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Full text of "Economic conditions in the Federal Republic of Germany: report"

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95th Congress 
2d Session 



COMMITTEE PRINT 



ECONOMIC CONDITIONS IN THE FEDERAL 
REPUBLIC OF GERMANY 



REPORT 

PREPARED FOR THE 

SUBCOMMITTEE ON EUROPE AND THE 
MIDDLE EAST 

OF THE 

COMMITTEE ON INTERNATIONAL RELATIONS 
U.S. HOUSE OF REPRESENTATIVES 

BY THE 

FOREIGN AFFAIRS AND NATIONAL 
DEFENSE DIVISION 

CONGRESSIONAL RESEARCH 

LIBRARY OF CONGRES 





DECEMBER 29, 1978 



Printed for the use of the Committee on International Relations 



35-452 



U.S. GOVERNMENT PRINTING OFFICE 
WASHINGTON : 1978 






COMMITTEE OX INTERNATIONAL RELATIONS 

CLEMENT J. ZABLOCKI, Wisconsin, Chairman 



L. H. FOUNTAIN, North Carolina 
DANTE B. FASCELL, Florida 
CHARLES C. DIGGS, Jr., Michigan 
ROBERT N. C. NIX, Pennsylvania 
DONALD M. FRASER, Minnesota 
BENJAMIN S. ROSENTHAL, New York 
LEE H. HAMILTON, Indiana 
LESTER L. WOLFF, New York 
JONATHAN B. BINGHAM, New York 
GUS YATRON, Pennsylvania 
MICHAEL HARRINGTON, Massachusetts 
LEO J. RYAN, California i 
CARDISS COLLINS, Illinois 
STEPHEN J. SOLARZ, New York 
HELEN S. MEYNER, New Jersey 
DON BONKER, Washington 
GERRY E STUDDS, Massachusetts 
ANDY IRELAND, Florida 
DONALD J. PEASE, Ohio 
ANTHONY C. BETLENSON, California 
WYCHE FOWLER, Jr., Georgia 
E (KIKA) DE LA GARZA, Texas 
GEORGE E. DANIELSON, California 
JOHN J. CAVANAUGH, Nebraska 



WILLIAM S. BROOMFIELD, Michigan 
EDWARD J. DERWINSKI, Illinois 
PAUL FINDLEY, Illinois 
JOHN H. BUCHANAN, Jr., Alabama 
J. HERBERT BURKE, Florida 
CHARLES W. WHALEN, Jr., Ohio 
LARRY WINN, Jr., Kansas 
BENJAMIN A. OILMAN, New York 
TENNYSON GUYER, Ohio 
ROBERT J. LAGOMARSINO, California 
WILLIAM F. GOODLING, Pennsylvania 
SHIRLEY N. PETTIS, California 2 
JOEL PRITCHARD, Washington 3 



John J. Brady, Jr., Ch'uf of Staff 



Subcommittee ox Europe and the Middle East 
LEE H. HAMILTON, Indiana, Chairman 
BENJAMIN S. ROSENTHAL, New York PAUL FINDLEY. Illinois 

STEPHEN J. SOLARZ, New York SHIRLEY N. PETTIS, California 

DONALD J. PEASE, Ohio 
GEORGE E. DANIELSON, California 

Michael H. Van Dusen. Subcommittee Staff Director 

Alison L. Brenner. Minority Staff Consultant 

Ronald L. Sorian'O, Subcommittee Staff Associate 

David Paul Barton, Subcommittee Staff Associate 

Sandra Decker, Staff Assistant 



1 Deceased. 

> Resigned committee Sept: 20', 1978. 

» Elected to conniittec S pt. 20, 1<J78. 



(n) 



FOREWORD 



House of Representatives, 
Committee on International Relation-. 

Washington, B.C., December .J.'', Wt . 
This study was prepared by the Library of Congress at the request 

of the Subcommittee on Europe and the Middle East, chaired by Hon. 
Lee H. Hamilton, and has been submitted to the Committee on 
International Relations. 

The work, which examines the economy of the Federal Republic of 
Germany and analyzes some of the implications for the United States 
of the emergence of West Germany as a major economic power, should 
be of benefit to members of the committee interested in the nature and 
management of our relationship with this important West European 
ally. The study complements a similar one prepared by the Library of 
Congress, entitled "Economic Conditions in Italy, France, and the 
Unite;! Kingdom" and published February 8, 1978, by the Committee 
on International Relations. 

The findings of the study are those of the Foreign Affairs and 
National Defense Division, Congressional Research Service, Library 
of Congress, and do not necessarily reflect the views of the membership 
of the Committee on International Relations. 

Clement J. Zablocki, Chairman. 
(iiii 



Digitized by the Internet Archive 
in 2013 



http://archive.org/details/economicconditioOOIibr 



LETTER OF TRANSMITTAL 



House of Representatives, 
Committee ox International Relations, 
Subcommittee ox Europe and the Middle East, 

Washing'on, D.C. December 29, 1978. 
Hon. Clement J. Zablocki, 
Chairman, Committee on International Relations, 
House of Representatives, Washington, D.C. 

Dear Mr. Chairmax: I enclose a study prepared for the Subcom- 
mittee on Europe and the Middle East by the Congressional Research 
Service of the Library of Congress. 

This report examines the economic conditions in the Federal Re- 
public of Germany. This study follows an earlier report on Italy, 
France, and the United Kingdom and thereby completes a broad look 
at the economies of four of our allies and the four largest members 
of the European Community. 

West Germany, by its sheer economic strength and potential, has 
become a critical actor on the world scene. Its leadership role in Europe 
is uncontested. United States-West German relations have generally 
been excellent, although some policy differences exist. The willingness 
of both the United States and the Federal Republic of Germany, 
however, to cooperate in important policy areas such as military 
security and monetary affairs is a positive factor in enhancing the 
stability of the West. 

This report was prepared by Edward T. Lampson, Specialist in 
European Affairs, Foreign Affairs and National Defense Division, 
Congressional Research Service, Library of Congress, and is being 
published in response to the renewed interest in Western European 
nations expressed by many Members of Congress and others con- 
cerned about the nature of our relations with our principal European 
allies. 

The analysis presented here is that of the Congressional Research 
Service and does not necessarily represent the views of the members 
of the Subcommittee on Europe and the Middle East. 

Lee H. Hamiltox, Chairman, 
Subcommittee on Europe and the Middle East. 

I VI 



C O N T E N T S 



Pase 

Foreword in 

Letter of Transmittal v 

Preface ix 

I. Summary and Comment 1 

A. General observations 1 

B. Summary of West German economic development 5 

C. German economic policy 6 

(1) Unemplovment (*> 

(2) Growth rates 7 

(3) Development of reflation policy 7 

(4) Outside pressure for reflation 7 

(5) Appreciation of currency 8 

(6) EC membership 8 

(7) The Communist states 8 

(8) The Third World 9 

(9) Trade 9 

II. The Recent Economic Past, 1972-77 11 

A. The commoditv price boom and continuing inflation 11 

B. The 1973-74 OPEC oil price increase 12 

C. The recession of 1974-75 12 

D. The German international financial situation 14 

E. The decline of the dollar and United States- West German relations. 14 

F. The advisability of German reflation 15 

III. Background Statistical Data With Commentary 1955-75 19 

A. Gross national product 19 

B. Inflation 21 

C. Population and employment 21 

D. Industrial activity 23 

E. Balance of payments 24 

F. Exchange rates 26 

G. Import dependence 27 

IV. Institutional Factors 31 

A. The managerial class 31 

B. The trade unions 33 

C. Codetermination 34 

D. The German civil service 35 

E. Governmental stability 37 

F. The economic philosophies of West German political parties 39 

(1) The Christian Democratic Union/Christian Socialist 

Union 39 

(2) The Social Democratic Party 40 

(3) The Free Democratic Party 41 

V. Concluding Comment 43 

A. Short-term political possibilities 43 

B. U.S. policy objectives and the Federal Republic of Germany 44 

C A final comment I 45 

(VII) 



PREFACE 



This paper on economic conditions in The Federal Republic ol 
Germany (FRG) is a sequel to an earlier committee print on economic 
conditions in Italy, France, and the United Kingdom. 1 The earlier 
report supplied background material for estimates about the likelihood 
of an economic crisis of serious proportions occurring in any of these 
countries, the possible consequences of such an event for the United 
States, and approaches to be taken to cope with it. 

The present paper aims to round out the picture by discussing salient 
features of the strongest economy in Western Europe. It provides a 
brief summary of the FRG's economic strengths and areas of strain, 
the main lines of its economic policy, and its ability and willingness to 
support other countries in Western Europe. 



1 "Economic Conditions in Italy, France, and the United Kingdom," report prepared for the Subcom- 
mittee on Europe and the Middle East of the Committee on International Relations by the Foreign Affairs 
and National Defense Division, Congressional Research Service, Library of Congress, Feb. 8, 1978, U.S. 
Government Printing Office, Washington, 1978. 

(IX) 



35-452—78- 



I. SUMMARY AND COMMENT 

A. General Observations 

The material presented in this report leads to the following 
observations: 

(1) The West German economy is the strongest in Europe. Its 
efficient industrial plant, outstanding technical abilities, skilled labor 
force, comparatively harmonious industrial relations, and reputation 
for quality and prompt delivery have made its exports flourish. Even 
in bad times the demand for German goods has proved to be relatively 
inelastic. Its record of a trade surplus in every year since 1950 is 
unmatched in Europe and has resulted in building up the largest. 
inl ernational reserves of any country in the Organization for Economic 
Cooperation and Development (OECD). 

(2) A prudent and steady economic policy, designed with particular 
attention to maintaining the soundness of the German mark, has 
contributed to this constant growth of reserves. They now stand at 
over $43 billion. In times of instability in the international exchange 
market, particularly when the chief reserve currency, the dollar, is 
falling, the German mark is an obvious refuge for foreign exchange 
traders. This factor has contributed to the appreciation of the mark 
against the dollar by more than 24 percent in the last 12 months — a 
fact which lias created difficulties for German exporters. 

(3) West Germany's economic strength gives it great influence both 
in Europe and overseas. For example, the German Government in 
1974 contributed to the shoring up of the hard-pressed Italian Govern- 
ment by loaning it $2 billion to build up its seriously depleted reserves. 
Again in 1976, when an Italian parliamentary election was taking 
place, the West German Central Bank loaned the Italian monetary 
authorities an additional $500 million. West Germany likewise has 
played some part in encouraging the emergence of a democratic 
Portugal. It participated in 1975 and 1976 in EC loans to Portugal. 
In 1977 it lent the Portuguese Socialist-led coalition government $200 
million as a member of an international consortium. (The United 
States lent $300 million.) Acting outside of Europe, the West German 
Government recently announced its intention to write off the debts of 
some of the poorest countries, as a number of other countries have 
also done. 1 

(4) German international resources have also played an important 
part in the defense of the dollar. In January and March 1978 the 
German Central Bank increased its swap arrangements with U.S. 
financial institutions by $4 billion. The principal concern of German 
officials regarding the depreciation of the dollar is the threat it repre- 
sents to the stability of the entire financial s}^stem. However, German 
interests have also been directly affected by the dollar's decline. In 
the last year the market value in marks of the German Central Bank 



The West German Government is writing of! the debts of 30 countries. 

(1) 



2 

holdings of U.S. Treasury notes fell by $7.9 billion. In view of these 
circumstances, the pressure applied by German officials for the reduc- 
tion of oil imports and the improvement of the U.S. balance of pay- 
ments will probably continue. 

(5) Another example of German strength is its influence in inter- 
national organizations such as the European Community (EC), the 
Organization for Economic Cooperation and Development (OECD), 
and the International Monetary Fund (IMF). The West German 
IMF quota is currently SDR 2.156 billion or 5.6 percent of the total. 
West Germany "represents one-third of the economic potential of 
the entire Community" 2 and is the largest contributor to the EC 
budget (37 percent) with an estimated 1978 assessment of approx- 
imately $5 billion. It also made loans of more than $500 million for 
EC medium-term monetary assistance programs in 1977. 

(6) Among the EC's Big Four, West Germany is the strongest 
supporter of European integration. The advantages of membership 
in a flourishing West European economic and political organization 
are clear. A leading position in it would give great influence not 
only in Europe but throughout the world. West Germany will surely 
continue its strong support of the EC, including generous assistance 
to current and potential EC members in economic straits, as required, 
preferably in cooperation with international organizations and the 
United States. 

(7) In these circumstances it is not surprising that the German 
Government is assuming a greater role in West European decision- 
making — a role which in the past it had avoided. An example is the 
German-French initiative taken at an EC Council meeting at Bremen 
in July 1978 for the establishment of an EC-wide system of closely 
coordinated European currencies (an enlargement of the so-called 
snake). The Germans proposed the scheme because they felt the need 
for greater monetary stability to restore business confidence in the 
West European area where roughly 65 to 70 percent of German exports 
are sold. The new plan may also prevent the German mark from 
becoming a reserve currency. An essential element of the project is 
the use of German assets as a major contribution to the European 
Monetary Fund which will be set up. In addition to this use of German 
assets there has been some talk — but no official confirmation — of 
plans for using some assets to finance a Marshall plan-type aid program 
to prepare Greece, Portugal, and Spain for entry into the EC. 

(8) In the light of such developments it seems likely that the 
German Government will play an even larger role than it now does 
in the development of economic policy among the OECD countries 
as well as in the narrower membership of the EC, particularly if 
France, Britain, and Italy continue to face economic difficulties. 

(9) The West German position of strength may be reasonably 
expected to continue for some time to come unless there are drastic 
political chano-es that currently seem unlikely. A change from the 
present SPD/FDP coalition to a government led by the CDU/CSU 
would not destroy the unusually broad consensus on economic and 
political policies which now exists among the German people. Should 
this consensus be lost, West Germany would face difficult socio- 
economic problems. 



1 Morgan, Roger, West Germany's Foreign Policy Agenda, Beverly Hills, 197S, p. 50. 



(10) Despite its large international reserves and its highly produc- 
tive and well-managed industrial system, the strongly export-oriented 
West Germany, like several other European countries, is more vul- 
nerable to the effects of a worldwide recession than the United States, 
which depends primarily on an internal market. Dependence on foreign 
demand in the depressed conditions of the 1970's has slowed down 
West Germany's earlier rate of growth. The 1977 growth rate of 2.6 
percent and the projected rate lor 1978 of 2.5 to 3 percent are con- 
sistent with its record from 1971 through 1977, which averaged 2.7 
percent. The average rate of growth for 1955-69 was 6 percent. 

(11) West German leaders' fear of inflation limits what the West 
German Government is prepared to do to reflate the economy. Tins 
fear is reinforced by watching U.S. dollar inflation. (Generous Ger- 
man unemployment benefits make the Government's current cautious 
fiscal and monetary policy palatable to the trade unions.) Although 
West German concern about unemployment and inflation may seem 
exaggerated to outsiders, the parts played by these factors in German 
history, especially in the rise of Nazism, should not be overlooked. 

(12) West Germany has firmly refused to stimulate its economy 
to the point where there would be a risk of serious inflation for the 
sake of pulling other European countries out of their economic dol- 
drums. Another consideration in stimulating the economy through 
increased public spending is the constitutional provision that restricts 
Federal Government deficit spending to the level of capital outlays. 
The Government is also concerned that excessive public borrowing- 
may "crowd out" private borrowers and increase interest rates. In 
addition to the inflation factor, German officials question the sound- 
ness of expecting too much from stimulative programs because of the 
high German propensity to save and the concomitant low consumption 
propensity. These characteristics tend to delay the effect of tax 
reduction and transfer payments upon domestic demand. 

(13) The points outlined above illustrate how Germany's economic 
strength has endowed it with an increasingly impressive degree of 
international influence. Thus a harmonious relationship between the 
United States and the Federal Republic of Germany may be even 
more important in the future than in the past and more difficult to 
achieve. Hence it seems pertinent to summarize briefly some of the 
factors which may affect this relationship. 

(14) The question arises whether increasing German influence in 
the EC will have detrimental implications for the United States. The 
U.S. Government has from the beginning supported the European 
Common Market but has never forgotten the possibility that the 
EC could adopt anti-U.S. positions. In the case of Germany, military 
dependence on the United States and a front-line position have, at 
least so far, ruled out any such self -centered behavior as exhibited 
by the French under General de Gaulle. The United States, however, 
in order to maintain this state of affairs, must conduct its relations 
with the EC and its individual members, especially West Germany, 
so as to prevent a repetition of the bad feeling which occurred in 
the 1971-74 period. 

(15) In the future West Germany may find its interests in various 
fields — particularly economic matters — coinciding with those of its 
EC partners more than with the United States. A recent example 
was during the 1973-74 oil crisis when West Germany objected 



strenuously to the use of German ports by the United States to ship 
military supplies to Israel during the Arab-Israeli War. West Germany's 
acute dependence on Arab oil made it line up with the other EC 
countries in opposition to the United States. 

(16) German officials and industrialists hope to maintain the high 
level of German exports by replacing traditional uncompetitive ex- 
ports like steel and textiles with high-technology products. An impor- 
tant step was taken in this direction in 1975 when the Brazilian and 
German Governments signed a contract estimated to be worth 
between $6 billion and $10 billion for the delivery of nuclear reactors 
and enrichment and reprocessing equipment. President Carter strongly 
opposed the deal on the ground that it involved an unacceptable risk 
of nuclear proliferation. The German Government is insisting on the 
complete fulfillment of the original terms of the contract but has 
made some concessions which the U.S. Government finds inadequate. 
The Nuclear Non-Proliferation Act of March 1978 provides for an 
embargo of uranium to countries exporting sensitive nuclear materials 
and equipment. Thus a failure to work out United States- German 
differences in the Brazilian case could result in a cessation of U.S. 
shipments of enriched uranium to Germany. 

(17) Disagreements about how to handle human rights questions 
with the Soviet Government have arisen between President Carter 
and Chancellor Schmidt. The latter believes that quiet diplomacy 
provides the most effective way to assist the victims of Communist 
repression rather than resorts to highly publicized attacks on the 
Soviet Union for violations of the civil rights provisions of the Hel- 
sinki Accord. The Germans have made substantial progress in re- 
uniting German families through their methods. 

(18) Competition for the sale of military equipment in NATO, and 
especially the allocating of contracts for the standardization of NATO 
equipment, has caused conflicts of interest in the past between the 
Germans and the Americans; for example, the influence of the United 
States in blocking the selection of the German Leopard tank as the 
future standard NATO tank in favor of the U.S. XM-1 tank. Such 
competition is likely to continue. 

(19) In order to keep our relations with West Germany on a good 
footing, care must be taken to avoid what may appear to the West 
Germans to be unilateral decisions taken because of our strategic 
superiority. One early example was the introduction in 1961 of the 
doctrine of flexible response as a key element in U.S. strategy, which 
was not accepted by NATO until 1967. A recent example is the ques- 
tion of whether to assign neutron bombs to the German front. After 
initial U.S. stress on the advantages of the bomb and over sizable 
domestic opposition, the Schmidt Government supported the station- 
ing of neutron bombs in West Germany. The Government's position 
was then undercut when President Carter postponed indefinitely 
putting the bomb into full production. Failure to reach clear and 
definitive decisions in such cases is going to be even more damaging 
in the future than in the past. 

(20) The West Germans have been concerned about the linkage 
between the mutual and balanced force reduction negotiations (MBFR) 
and the strategic arms limitation talks (SALT). They Tear that the 
United States and the Soviet Union will negotiate bilaterally about 



European theater nuclear weapons rather than in the multilateral 
MBFR negotiations where Wesl Germany would be represented. 
This is because the next round of SALT negotiations will probably 
focus on so-called "gray areas" including MKBM's. 3 They also fear 
that the United States may surrender the right to transfer cruise 
missiles to their NATO allies in return for Soviet concessions in the 
current negotiations. In general they are concerned about the 
possibility that restrictions on the use of nuclear weapons may leave 
Europeans without sufficient retaliatory force to neutralize Soviet 
medium-range nuclear weapons targeted on Western Europe. 

(21) To sum up, the increasing influence of West Germany, although 
in some instances it may operate to oppose specific U.S. interests, on 
the whole promises to be used in the future, as it was to a remarkable 
degree in the past, to advance policies wmich the United States favors 
in the defense, political, and economic fields. To make the most of this 
fortunate situation, the United States must take care not to ignore 
German interests or appear to be attempting to dictate courses of 
action to the German Government. In particular, it is important to 
keep Germans fully informed and consulted about U.S. negotiations 
with the Soviet Union affecting German interests. 

The points noted above should be considered against the background 
of West German economic developments since the war and current 
West German policies. These subjects are summarized in sections B 
and C of part 1. Recent German economic developments (1972-78), 
including the part played in United States-West German relations 
by the issues of dollar depreciation and German reflation policy, are 
discussed at greater length in part II. Part III provides background 
material with commentary. Part IV discusses institutional factors 
affecting the German economy. Part V contains a closing comment. 

B. Summary of West German Economic Development 

The German currency reform of 1948 set the German economic 
revival in motion. In the early days it was fueled by Marshall plan and 
other foreign aid totaling $4.5 billion. By the early 1950's a flourishing 
export trade was developing stimulated by a purposely undervalued 
German mark. The mark remained undervalued until the early 1970's. 
German characteristics of hard work and technical skills were rein- 
forced by an ample supply of German expatriates from the East up to 
1961 when the East German Government sealed off the German 
Democratic Republic from the West. Thereafter there was a massive 
influx of largely unskilled workers from southern Europe and the east- 
ern Mediterranean. Unusually good relations between union leaders 
and industrial leaders, reflected in the early years in relatively low 
wages, and the high quality of German goods contributed to a booming 
export trade. The peak years of the "German miracle" were between 
1950 and 1965. It was during these years that the present structural 
characteristics of the German economy were developed — an economy 
skewed more and more in the direction of exports. By 1977 one out of 
every four German workers was producing for exports. 

Important economic consequences followed from domestic German 
political developments in the late 1950's and 1960's. In 1959 the Social 
Democratic Party (SDP), which traditionally advocated widespread 

3 Medium range ballistic missiles. 



6 

nationalization, shifted to an acceptance of a free market economy 
with heavy emphasis on social programs. This prepared the way for the 
SDP to enter the German Government in 1966 and for the develop- 
ment of an unusually broad consensus on basic economic policy 
throughout the German population. As a result of the economic strains 
in 1966-77 the Government obtained legislative authority and devel- 
oped administrative techniques for influencing economic events 
through Keynesian methods. 

In the early 1970's developments took place which diminished some 
of the Federal Republic's earlier advantages in the world market. 

As a result of the East German decision in 1961 to block emigration 
into Western Germany, the German skilled labor force tightened. 
A new generation of labor leaders was ready to take advantage of 
labor's improved bargaining position. As a result, German labor costs 
began to surpass levels in other industrial countries. 

In 1967, 1971, and 1974-76 an unstable international economic 
situation forced many German exporters to absorb increased costs in 
order to maintain well-established trading channels. The concomitant 
reduction of profit margins was reflected in a decline of private invest- 
ment and slower technological progress. 

By 1972-74 West Germany was faced with the repercussions of a 
worldwide commodity price boom and of the quadrupled price increase 
of OPEC oil. During the mid-1 970's the German Government suc- 
ceeded in keeping inflation far lower than other European countries. 
In 1974 the German Consumer Price Index reached its peak at an 
annual rate of increase of 7 percent. By 1977 the rate was reduced to 
3.5 percent and to 2.4 percent in July 1978. The appreciation of the 
German mark was a major factor in holding down the cost of imports, 
at least relatively. 

The recession of 1974-76, however, hit the German economy hard. 
The drop in foreign demand for German goods brought German 
production to the point where the industrial plant was operating in 
the third quarter of 1977 at less than 82 percent of capacity (though 
still above the figures for Britain, France, and Italy). In 1975 the 
German real annual GNP growth rate dropped 2 percent. After a 
rise to 5.7 percent in 1976, it fell back to 2.6 percent in 1977. The 
growth rate for 1978 is currently estimated at about 2.5 to 3 percent. 
Unemployment has doubled since the early 1970's. Of the West 
German labor force 4.4 percent was unemployed in May 1978. 

C. German Economic Policy 

A brief description of West German economic policies, especially 
those aimed at dealing with present economic problems, follows: 

(1) UNEMPLOYMENT 

Faced with an unemployment figure of more than a million, the 
German Government has encouraged the repatriation of as many as 
possible of its foreign workers, who numbered about 2.5 million in 
1972; but only about 700,000 have actually left, Since November 1973 
it has stopped issuing permits lor the entry of now foreign workers. 
(This restriction does not apply to citizens of EC countries, notably 
the Italians.) 



Some Government economic measures, especially Government 
investment programs and tax cuts, have been initiated to increase 
employment. Retraining programs are underway and the Minister of 
Economics is working on plans for developing new growth industries. 
Full unemployment payments last year and reduced benefits are 
available thereafter. But the determination to avoid a high rate of 
inflation puts a limit on what the Germans are willing to do to cre- 
ate jobs. 

(2) GROWTH RATES 

The German Government has been prepared to stimulate the 
economy, provided this does not seriously increase the rate of inflation. 
In 1975 the Government expanded its investment programs, in- 
creased transfer payments such as children's allowances for families 
with two or more children, lowered Bundesbank discount rates, 
increased investment incentives, et cetera. These programs were 
largely paid for by deficit financing. In 1976, when the economy grew 
by 5.7 percent, reflation planning was cut back. But the growth rate 
began to drop in early 1977 and in the spring the Government adopted. 
a medium-term investment program providing for some $13 billion in 
additional Government investment during 1977-81. In October 1977 
the Germans passed a major tax cut. The growth rate for 1977 aver- 
aged only 2.75 and growth is expected to be only marginally higher in 
1978. So another stimulation program of limited scope is being planned 
to take effect in 1979-80. 

(3) DEVELOPMENT OF REFLATION POLICY 

The degree of Government stimulation appropriate for the TVest 
German economy has been a source of bitter controversy in the past. 
The first Social Democratic Economics Minister, Karl Schiller, re- 
signed in 1972 because the Cabinet overruled his insistence on dropping 
any reflationary measures which might involve higher inflation or 
deficit spending. The present Government is strongly opposed to 
measures which would significantly raise the inflation rate. German 
planners operate within clearcut limits. Article 115 of the German 
Constitution authorizes Government borrowing as a rule "only for 
expenditures for productive purposes and only on the basis of a federal 
law." 4 Public borrowing is also kept down so as not to squeeze private 
borrowers out of the capital market. The present plans for economic 
stimulation are not to exceed about $30 billion or roughly 4.75 percent 
of GNP. In general it is the German Government's position that cur- 
rent economic problems cannot be solved by quick fixes but require 
more substantial treatment. They plan public investment programs 
and other fiscal measures to develop advanced growth industries and 
retraining programs to equip labor to enter new types of jobs. 

(4) OUTSIDE PRESSURES FOR REFLATION 

In the recent past the United States and other OECD members 
have urged the Federal Republic to reflate more than the latter has 
been willing to do. In 1977 and 1978 the OECD Secretariat and leading 



4 Peaslee, Amos J., Constitutions of Nations, 2d ed., 19.56, vol. ii, p. 53. In recent parliamentary debates 
it has been argued that "the continuing excess of net lending [to deal with the excess labor supply] over 
fixed investment is unconstitutional." OECD Surveys Germany, June 1978, p. 43. 

35-452—78 3 



8 

member states urged an increase of the German growth rate up to 
5 percent from the 3.5 percent forecast for 1978. Some U.S. experts 
believed this could be done without inflation because of the amount of 
unused capacity in the German industrial system and because the 
German labor market was slack with more than a million out of work. 
Pursuant to its commitment at the Bonn Economic Summit Meeting 
in July 1978 the German Government has agreed to a limited amount 
of reflation. It has proposed tax cuts and related measures equivalent 
to 1 percent of German GNP. These measures should become effective 
on January 1, 1979, and January 1, 1980. 

(5) APPRECIATION OF CURRENCY 

Up to the end of 1971 the German mark was greatly undervalued. 
Since then it has been revalued a number of times. Since 1973 the 
mark has floated freely. Recently the German Government has been 
concerned about the appreciation of the mark which has created diffi- 
culties for German exporters. Between May 1977 and May 1978 the 
mark has appreciated by more than 20 percent. There is a close con- 
nection between the appreciation of the mark and the depreciation of 
the dollar. Thus German moves to come to the defense of the dollar in 
the international exchange market and by increasing its credit line to 
the U.S. Treasury and the Federal Reserve are related to their concern 
for the mark. So may the recent initiative of the German and French 
Governments to establish a new European monetary system. 

(6) EC MEMBERSHIP 

Looking upon membership in a European supranational organiza- 
tion as one way to resolve the problems and nightmares of recent 
German history, the West Germans have been strong supporters of 
the EC from the beginning. Although the original enthusiasm has 
cooled somewhat, among the EC's big four the Germans are the most 
deeply committed. If the German initiative for establishing a Euro- 
pean monetary system is successful, it should be a big step toward 
fuller integration which has been stalled for the last 5 or 6 years. 

As members of the EC, the Germans try to apply their free trade 
principles to the greatest extent possible. But they are unlikely to 
succeed in dismantling the protective features of the market against 
outside competition as much as they wish because other EC members, 
particularly the French and the British, are determined to keep them. 
And in the case of the common agricultural policy, German farmers 
will support the continued protection of agriculture. 

(7) THE COMMUNIST STATES 

Especially since the recession in the West, the West Germans have 
been eager to improve their commercial relations with the Communist 
bloc. This was a natural part of Chancellor Brandt's Ostpolitik by 
which the West Germans hoped to reduce tensions and improve 
prospects for their relationships, at least on a humanitarian level, 
with the Germans in the German Democratic Republic. In 1973-74, 
West German trade with the Soviet bloc plus Communist China rose 
by 39 percent. German exports have been heavily financed by German 
loans which have been primarily extended by private creditors. 



Between 1972 and 1976, Communist indebtedness has more than 
doubled. Eastern countries are trying to reduce this indebtedness by 
increasing exports and slowing imports. Contrary to expectation, the 
Soviet Union has not been able to balance its accounts by supplying 
West Germany with oil, natural gas, or electric power in any signifi- 
cant amounts. 5 Despite the rapid growth in trade with the Communist 
countries, this trade accounted in 1977 for only 6.1 percent of total 
German exports. 6 

(8) THE THIRD WORLD 

The West Germans are greatly interested in improving economic 
relations with the Third World. Although West Germans had no 
ex-colonies with which they had special relations, like the British, 
the French, and the Dutch, they are well aware of the importance 
of less developed countries as sources of raw materials and potential 
markets for German exports. They have been active participants in 
the Development Assistance Committee (DAC) of the OECD. Recent- 
ly, they have stepped up their aid to strategically placed countries in 
Africa such as Zambia and Zaire. 

In connection with the international discussion over what kind of 
a new economic policy can best take account of the requirements of 
less developed countries, the Germans have taken part in meetings of 
UNCTAD and the French-initiated Conference on International 
Economic Cooperation (CTEC). In general, the Germans have upheld 
the free trade principles which have guided German trade policy from 
the beginning of the Bundesrepublik. 

They have generally looked with disfavor on plans for controlled 
markets and thus have opposed the UNCTAD Common Fund pro- 
posal to finance the stabilization of price levels of selected commodities. 
In their view, the provision of large buffer stocks of primary commodi- 
ties would be cost!}" and would distort the operation of world market 
forces. 7 

(9) TRADE 

Export trade remains central to German economic development. 
Despite a decline in foreign demand since 1974 and a consequent 
slowdown of the economy, Germany has been able to maintain a 
surplus trade balance. As in the past, demand for German goods 
has been relatively inelastic. However, the nature of German goods 
is beginning to change. Older industries such as steel, textiles, and 
mass-produced machine tools are finding it increasingly difficult to 
stand up to the competition from factories in countries with low labor 
costs. Forward-looking producers are specializing on newly designed 
motor vehicles, advanced electrical equipment, chemicals, optical 
and precision mechanical products, and machinery — goods which form 
the bulk of German exports to the United States. 

German exports to the United States amounted to $7,215 billion 
in 1977. (Between January and July 1978, exports to the United 
States rose by 18 percent.) German imports from the United States 
came to $5,982 billion, leaving a U.S. deficit in this bilateral trade in 
1977 of $1,233 million. The main German exports to the United States 



s Morean, op. cit., pp. 2.3-24. 

« OECD Statistics of Foreign Trade, July 1978, p. 72. 

7 Morgan, op. cit., pp. 58-69. 



10 

in 1977 in millions of dollars were motor vehicles (2,975), machinery 
(1,445), chemicals (971), electrical equipment (382), optical and pre- 
cision mechanical products (263). The main German imports from the 
United States were machinery (1,053), chemicals (1,006), edible fats 
and oils (844), electrical equipment (749), grains (500), and aircraft 
(41 1). 8 

Profiting from an expanding import market, U.S. sales in 1977 of 
finished manufactures exported to Germany amounted to $4 billion, 
an increase of 15 percent over the previous year. 

Sales should be higher in 1978 because the decline of the dollar has 
given U.S. goods a competitive edge not only in Germany but also in 
third markets where Germany has a significant share of the market. 9 
There are no major commercial issues outstanding between West 
Germany and the United States. 

The chief sales area for Germany is Western Europe where German 
exporters sold just under 65 percent of their total exports in 1977. 
Other areas can be divided into roughly equal groups as follows: The 
United States (6.67 percent), Communist countries (6.12 percent), 
the Middle East (6.12 percent), Africa (4.80 percent), Latin America 
(3.48), the Far East (2.60 percent), and Japan (2.37). 

In terms of trade policy, the German Government still adheres to 
the free market principles which were applied by the Adenauer 
government. As a member of the EC, West Germany is bound by the 
tariff arrangements agreed to within that organization, but it exerts 
pressure in the direction of freer trade. 

» OECD Statistics of Foreign Trade, July 1978, pp. 72-73. 

• American Embassy, Bonn, Foreign Economic Trends and Their Implications for the United States, 
May 1978, pp. 9-11. 



II. THE RECENT ECONOMIC PAST, 1972-77 

A. The Commodity Price Boom and Continuing Inflation 

Of all the countries of Western Europe, the Federal German 
Republic has been the most successful in holding down the inflationary 
pressures created by the commodity price boom of 1972-74, the 
1973-74 OPEC oil price increase, and the ensuing 1974-76 recession. 

Despite its economic strength, the Federal Republic was far from 
immune to the consequences of external price increases. Imports of 
food, raw materials, fuels, and semiprocessed manufactures, all 
essential to the domestic economy, accounted for 56 percent of German 
imports. Thus, the steep rise in the prices of primary commodities 
contributed to domestic inflationary pressures already generated by 
rapid wage increases. As a result, the German Consumer Price Index, 
which had shown an annual increase of above 3.5 percent only once 
between 1955 and 1970, rose swiftly. In 1974 it reached the high point 
of 7 percent. This was a relatively low figure compared to increases 
two or three times as large in other major European countries, but it 
was considered dangerously high in Germany. 

Increases in German consumer prices and industrial wages between 
1972 and 1977 as compared to the situations in Italy, France, the 
United Kingdom, and the United States are shown in the following 
t flbl p^ 

TABLE 1 1-1.— CONSUMER PRICES i 

[1971 = 1001 







1971 


1972 


1973 


1974 


1975 


1976 


1977 


Germany 

Italy 

France 

United Kingdom 




100 
100 
100 
100 
100 


105.5 
105.7 
105.9 
107.1 
103.3 


112.8 
117.1 
113.6 
117.0 
109.7 


120.7 
139.5 
129.2 
135.7 
121.8 


127.9 
163.2 
143.4 
168.5 
132.9 


133.7 
190.6 
157.2 
196.3 
140.6 


138.6 
225.3 
172.1 
224.0 


United States 




149.7 








« Adapted from table 18, OECD Economic Outlook, vols. 20-22. 

TABLE 11-2.— HOURLY EARNINGS IN MANUFACTURING! 
[Percentage changes] 








1972 


1973 


1974 


1975 


1976 


1977 


Germany 

Italy 

France 

United Kingdom 

United States 






8.7 
10.4 
11.3 
12.8 

6.7 


10.7 
24.3 
12.4 
12.6 
6.8 


10.6 
22.4 
18.6 
17.0 
8.4 


8.2 
24.0 
15.0 
14.0 

8.0 


6.5 
21.1 
14.7 
16.6 

7.9 


7.0 
26.0 
12.0 
10.0 

8.0 











\ Table 16, OECD Economic Outlook, vols. 20 and 22. 

It should be noted that in the case of Germany the increase in wages 
exceeded the increase in the cost of living by a smaller amount than 
in the other three countries. 

(11) 



12 

German success in reducing the inflation rate can be attributed to 
restraint in wage negotiations, the reduced prices of imports because 
of the steady appreciation of the German mark, and firm fiscal and 
monetary policies which restricted the economy in 1972-73 and then 
reflated somewhat in 1974 in the face of the recession of that year. 

B. The 1973-74 OPEC Oil Price Increase 

The quadrupling of OPEC oil prices increased German expenditures 
on imported oil from $5.9 billion in 1973 to $12.5 billion in the follow- 
ing year. (Germany produced only about 5 percent of its oil require- 
ments domestically and was dependent on imports for about 57 per- 
cent of its total energy requirements.) Unlike most other European 
countries, however, the Federal Republic ended the year with a trade 
surplus of over $15 billion. Late in 1974 the Federal Ministry of 
Economics stated that "the Federal Republic is not likely to suffer 
from the balance of payments difficulties in the foreseeable future that 
result from higher oil prices." * The subsequent German record bore 
out his prediction, as in the following years Germany maintained a 
continuous overall trade surplus. 

Thus the German economy was not thrown off balance by oil price 
increases to the extent of the other major European trading countries. 
But West German trade with OPEC countries was in surplus in 1977 
for the first time since 1973. 2 (This was partly because of rising 
imports of North Sea oil.) 

C. The Recession of 1974-75 

The world inflation in commodity prices indirectly forced the 
German economy into its most severe postwar recession. In 1972-73 
inflationary demand pressures in other industrialized Western countries 
had created a German export boom. But the increase in oil prices in 
1974 generated strong deflationary pressures on aggregate international 
demand, especially in OECD countries which accounted for over 70 
percent of the sale of German exports. 3 Sales of German basic and 
investment goods plunged, as did consumer goods to a lesser degree. 
As a result, German GNP increased at an annual rate of only 0.4 
percent in 1974. 

Reacting to the severe drop in foreign and domestic aggregate 
demand and sharply reduced domestic production, in 1975 German 
GNP registered its poorest performance since 1948; it declined by 
2 percent. Concurrently, German unemployment rose to 1.02 million, 
double the figure for the preceding year. Furthermore, in the face of 
the appreciation of the German mark and rising labor costs, German 
exporters cut profit margins in order to keep export prices competitive. 
As a consequence, domestic investment suffered. 

As is shown by some statistical comparisons, the Federal Republic's 
GNP performance followed roughly the same pattern as did its major 
Western partners in the OECD (with the exception of the United 
Kingdom) but Germany had a considerably lower level of 
unemployment. 

1 The Federal Minister for Economics, 1st Revision of the Energy Programme of the Federal Govern 
ment of Germany, Bonn, Germany, November 11)74, p. 8. 

2 Monthly Roport of the German Bundesbank for February 1978, p. 39. 
» OECD Economic Surveys Germany, June 1978, p. 20. 



13 

The following table illustrates the differences in the rates of economic 
growth in West Germany, Italy, France, the United Kingdom, and 
the United States for this period. 

TABLE 11-3— GROWTH OF REAL GROSS NATIONAL PRODUCT i 
(Percent change from year to year; constant dollars! 





1972 


1973 


1974 


1975 


1976 


1977 


Germany 

Italy 

France... 

United Kingdom 

United States 


3.0 

3.4 

5.5 

3.5 

6.1 


5.3 
6.3 
6.5 
5.2 
5.9 


0.4 
3.4 
3.9 
-.2 
-2.1 


-2 

-2.75 
1 

.5 
-3.75 


5.7 
5.6 
5.2 
2.1 

6.0 


2.75 
2 
3 

.25 
4.75 









i OECD Ecomonic Outlook, vols. 18, 20, 22, table 1, 

A table comparing unemployment rates shows that unemployment 
in West Germany, although viewed seriously by the German Govern- 
ment, was considerably lower than the figures for Italy, the United 
Kingdom, and the United States. The exodus of 700,000 foreign 
workers from West Germany in 1974 eased the situation somewhat 
and the practice of many German employers of shortening the work- 
time of their employees helped to reduce the number who were thrown 
out of work. 

TABLE 11-4.— UNEMPLOYMENT RATES « 
[Percent of total labor force unemployed] 





1973 


1974 


1975 


1976 


1977 


Germany 

Italy 

France 

United Kingdom 


0.9 

3.7 

2.6 

2.8 


1.5 

3.1 
2.7 
2.9 
5.4 


3.6 
6.4 
4.1 
5.1 
8.3 


3.6 
6.4 
4.6 
7.0 
7.5 


3.5 
7.2 
5.2 
7.5 


United States 


4.9 


7.0 









» OECD Economic Outlook, vols. 18-20, 22, tables 7 and 8. All figures except for the United States have been adjusted to 
international definitions by the OECD. 

The German Government acted quickly to improve the economic 
situation without driving up inflation. In 1972-73, the Government 
had introduced some restrictive measures to restrain inflationary 
forces, but these restraints were replaced in 1974 by a series of stimu- 
lative measures, including a 7%-percent investment grant, a com- 
prehensive fiscal reform package, a DM5.75 billion program to 
stimulate construction, and a DM 10 billion program for income 
transfers. Last, a tax bill was introduced in 1975 to provide for 
additional tax rebates. 4 

This vigorous Government policy contributed to an unexpectedly 
strong upswing of the economy in early 1976, supported later in the 
year by buoyant exports. GNP growth averaged out at 5.7 percent. 
In 1977, the recovery slackened, falling to an annual growth rate of 
2.75 percent. On the inflation front, West Germany, however, made 
a good showing. Helped by an appreciating mark and a slowing 
economy, the Consumer Price Index dropped from 4.5 percent in 1976 
to 3.7 percent in 1977, 5 and then to an annual rate of 2.4 percent in 
July 1978. 

* OECD Economic Surveys, Germany. May 1976, dd. 19-20j 
« Ibid., pp. 33-46. 



14 

D. The German International Financial Position 

According to the October 1978 issue of International Financial 
Statistics, West German international reserves at the end of March 
1978 amounted to $43 billion as compared to $29.7 billion for Japan 
and $19.41 billion for the United States. 6 Consistently large balance- 
of-payments surpluses and the flight of capital into the German mark, 
precipitated by the steep decline of the dollar in 1977 and 1978, 
account for an almost $10 billion increase in the German reserves in 
the last 3 years. 

The Bundesbank has kept the major part of this amount invested 
in U.S. Treasury bills and medium-term Treasury notes — roughly 
$32.5 billion as of July 1978. 7 As a result of these investments, the 
rapid depreciation of the dollar in the last year involved large-scale 
losses for the German Government, amounting to roughly $7.9 billion. 

Although on a rather limited scale when compared to the size 
of total reserves, the Bundesbank as of July 1978 had loans out- 
standing to the rest of the world amounting to DM5,380 million. Of 
this amount DM519 million consists of loans in connection with EC 
medium-term monetary assistance, DM1,884 million of claims arising 
from foreign exchange offset agreements with the United States and 
the United Kingdom, DM477 million of other loans to foreign monetary 
authorities, and DM2,501 million of loans to the World Bank. 8 

E. The Decline of the Dollar and United States-West German 

Relations 

From 1960 to 1977, the American dollar lost more than half its value 
in terms of German marks. In calendar year 1977 alone the German 
mark appreciated against the dollar by 10.8 percent. The dollar's 
rate of decline increased precipitously in the last 4 months of the year. 

The Carter administration made no moves until December 1977 to 
intervene in the market to stabilize the dollar. The administration 
expressed the view that the dollar's weakness merely reflected the big 
U.S. trade deficit of about $31 billion in 1977 caused by large U.S. oil 
imports and the relatively slow economic growth in Japan, Germany, 
and other countries. 9 

For many months Europeans were distressed by what they con- 
sidered American inaction. Indeed, some criticized Secretary of the 
Treasury Blumenthal for " talking the dollar down" deliberately in 
order to make American goods more competitive in world markets. 
German officials from Chancellor Schmidt down urged the United 
States to initiate an effective policy to reduce oil imports as soon as 
possible. Without such a program, they feared for the stability of the 
whole international financial system. Their concern increased as the 
dollar declined by 9.2 percent against the German mark from October 
to the end of December. 



{ International Monetary Statistics, October 1978, p. 167. 

7 Bundesbank, Monthly Report, August 1978, p. 74. 

i Ibid., p. 74. 

v President Carter's statement of Dec. 21, 1977, IMF Survey, Jan. 9, 1978, p. 8. 



On December 27, 1977, President Carter announced the intention of 
the U.S. Government "to intervene bo the extent necessary bo counter 

disorderly conditions in the exchange market." On January 4, 1978, the 
U.S. Treasury and the Federal Reserve Board issued a joint statement 
outlining steps in implementing the new policy. The Exchange Stabili- 
zation Fund of the U.S. Treasury of $4.7 billion would be utilized 
actively together with the $20 billion swap network operated by the 
Federal Reserve System. (According to agreements among the Group 
of Ten countries, central banks are to intervene in foreign exchange 
markets to smooth out erratic fluctuations.) A new swap arrangement 
between the Treasury and the Deutsche Bundesbank would provide 
the Exchange Stabilization Fund with an additional $2 billion line of 
credit which could be drawn on for intervention in the dollar market.* 9 

On March 13, 1978, the U.S. Treasury and the West German 
Finance Ministry reached a further agreement to work together to 
defend the dollar. As a result the Federal Reserve "increased its swap 
arrangements with the Bundesbank from $2 billion to $4 billion, 
thereby enlarging the Fed's total swap network with 14 central banks 
and the Bank for International Settlements to $22.16 billion." In 
addition, the Treasury stated that it was prepared to sell $740 million 
special drawing rights to the Bundesbank to buy marks. And the 
United States said that it would be willing to draw on its reserves of 
about $5 billion at the IMF, if and as necessary, to acquire additional 
foreign exchange to support the dollar. 11 

Foreign exchange traders questioned whether enough had been done 
bo restore confidence, and the dollar continued to decline. After a short 
time it began to consolidate its position a little above the 2-mark 
level. But in the latter part of July a new run on the dollar developed. 
By October 30 it had dropped to 1.7151 marks to the dollar. 12 

Thus, throughout the past year, the depreciation of the dollar 
has been a key factor in United States-West German relations. The 
two Governments have been in close touch, and the German Govern- 
ment has been consistently helpful. Not only through providing new 
ines of credit but also by direct purchases of dollars, it has con- 
tributed to preventing a runaway plunge of the dollar. At the same 
time German officials have urged the United States to adopt stringent 
measures to reduce its dependence on imported oil. 

F. The Advisability of German Reflation 

In early January 1977 pressure began to be applied by the United 
States, other OECD members, and the organization's Secretariat upon 
the Federal Republic to induce it to increase its economic growth rate. 
They wished to assign to the strong German economy the role of 
"locomotive" to pull the weaker European countries out of their 
doldrums. 



" J Ibid., p. 1. 

>i IMF Survey, Mar. 20, 1978, p. 8. 

is Wall Street Journal, Oct. 31, 1978, p. 



35-452—5 



16 

During the preparatory period before an economic summit meeting 
held in London in May 1977, U.S. officials at various levels made 
vigorous efforts to persuade the German Chancellor to modify what 
some U.S. economists viewed as his overcautious policy and his un- 
reasonable fears of inflation. Chancellor Schmidt took occasion to make 
clear the fixity of his views. In late January, the New York Times 
quoted him as saying that he would resist "any pressure from President 
Carter's advisers to pump in more money to stimulate the economy — 
at least until the planned economic meeting * * *" 13 

In fact the Germans passed a medium-term infrastructure invest- 
ment program in the spring providing for some $13 billion in additional 
Government investment during 1977-81. Presumably partly because 
of this German initiative, the tone of United States-German exchanges 
improved. Shortly before the conference opened there were statements 
from both West German and American sources that the two Govern- 
ments were working closely together. 

At the London Economic Summit the West German Government 
predicted that its economy would grow by about 5 percent in 1977 
after allowing for inflation. However, in succeeding months the German 
economy slackened. In the second quarter of 1977 it grew only 0.5 
percent at annual rates. In October 1977 the Germans passed a major 
tax cut program. But the average growth rate for the year was only 
2.75 percent. Because of this disappointing record the United States- 
West German argument recommenced. 

On their side American experts maintained that the German econ- 
omy could expand considerably without danger of inflation. Pointing 
to the findings of highly respected German economic research institutes 
that the German industrial plant was utilizing only 81 percent of its 
capacity, and to an unemplo3^ment figure of 1 million workers, they 
came to the conclusion that production could be expanded without a 
serious increase in labor costs or inflation. 

The Germans on their side argued that in their planning for the 1978 
budget they had reached the limit for expansion. They pointed out that 
their deficit for 1978 would amount to about DM60 to DM65 billion 
or about 4.5 percent of GNP as compared to a deficit of 2.75 percent 
of GNP in 1977. German analysts figured that the budget deficit for 
the United States would amount to only 1 percent of GNP. For France 
and the United Kingdom the figures given were 3.5 percent and 1 
percent of GNP, respectively. 

In addition, German economists pointed out that the German 
characteristic of saving incremental income rather than spending it in 
uncertain times tended to dissipate the effectiveness of some refla- 
tionary programs. Thus they doubted the efficacy of additional fiscal 
and monetary stimuli in producing additional demand. They believed 
that structural changes were necessary which could not be achieved 
overnight. German planners were thinking in terms of developing new 
growth industries through research and development projects in such 
fields as alternate sources of energy. 

The United States-West German arguments went on through early 
1978 at different levels. In February, German Economics Minister 
Lambsdorff reportedly failed to convince the Carter administration 



'• [bid.. Jan. 24, 1977. At). 



17 

that U.S. demands for reflating were more than the West German 
economy could carry out. He was reported as saying that the American 
position was unacceptable. 14 

At this stage Secretary of the Treasury Blumenthal took a prominent 
part in the discussions. lie continued to press lor a stronger program of 
economic expansion than the German Government would accept. 
Chancellor Schmidt refused to consider such a program until he could 
see the results of incentives which the German Government lias al- 
ready applied. Subsequently the tone of the exchanges of view appears 
to have become more temperate. Thus, on February 23, 1978, the 
New York Times reported that "the United States and West Germany 
have agreed privately to end their lingering public arguments about 
economic policy." 1,5 In June the New York Times quoted authoritative 
German sources as saying that West Germany was prepared to pro- 
mote faster economic growth at home if other countries renounced 
protectionism and the United States promised to curb oil imports. 16 

Pursuant to his Bonn Economic Summit commitment in July 1978, 
Chancellor Schmidt outlined a West German expansion plan including 
proposed tax cuts and new spending programs equivalent to about 1 
percent of GNP. The plan reportedly would involve tax cuts of ap- 
proximately $5.5 billion in 1979 and an additional $.'12 billion in 1980 
and would require Bundestag approval. New borrowing would total 
$17.9 billion (as compared to $15.41 in 1978) and additional revenue 
would be provided by an increase in the value added tax. According 
to the Wall Street Journal, Chancellor Schmidt declined to specify 
how much the package would stimulate growth but was confident it 
would boost growth some amount. 17 



' 4 Ibid., Feb. 13, 1978, pp. Dl, D6. 

'5 Ibid., Feb. 23, 1978, p. 1. 

' 6 Ibid., June 7, 1978, p. 5. 

' 7 The Wall Street Journal, July 31, 1978, p. 9. 



III. BACKGROUND STATISTICAL DATA WITH COMMEN- 
TARY, 1955-75 

A. Gross National Product 

In an earlier report on the economic conditions in Italy, France, 
and the United Kingdom 1 the limits and peculiarities of statistics 
used in the earlier study are discussed briefly at pages 28-29. The 
cautionary comments given there are equally applicable to the 
statistical material contained in this report. The following tables 
are prepared so as to be comparable to the statistical data on Italy, 
France, and the United Kingdom in the committee print cited above. 
This material covers the period 1955-75. 

TABLE Mil. — WEST GERMAN GROSS NATIONAL PRODUCT' 





Billion 

deutsche 

marks 


Change year 
to year 


Year: 

1955 


180.4 


14.3 


1956 


198.8 


10.2 


1957 


216.3 


8.8 


1958 


231.5 


7.0 


1959 


250.6 


8.3 


1960 


302.3 


20.6 


1961 . 


332.6 


10.0 


1962 


360.1 


8.3 


1963 


384.0 


6.6 


1964 


420.9 


9.6 


1S65 .... 


460.4 


9.4 


1966 


490.7 


6.6 


1967 


495.5 


0.9 


1968 


540.0 


9.0 


1969 


605.2 


12.0 


1970 


685.6 


13.3 


1971 


761.9 


11.1 


1972 


833.9 


9.5 


1973 


S27.5 


11.2 


1974 


997.0 


7.5 


1975... 


1,043.6 


4.7 









1 For statistical data on the post-1975 period see pt. II. 

Table III— 1 above illustrates the steady growth of the West German 
economy. Throughout the 21-year period 1955-75 this GNP growth 
averaged out to 5.12 percent per annum, the highest rate in Western 
Europe, surpassing the French economic performance by 0.12 percent. 
Between 1955 and 1970 the rate averaged 6 percent per annum and 
varied from 11.6 to —0.2 percent. Like other European countries, 
German growth was set back by the impact of world conditions in the 
1970's. 



See reference, p. VI I. 

(19) 



20 



TABLE 111-2. — GROSS NATIONAL PRODUCT IN CONSTANT 1955 PRICES 



Billion 

deutsche 

marks 



Change year 
to year 



ir: 
1955. 
1956. 
1957. 
1958. 
1959. 
1960. 
1961. 
1962. 
1963. 
1964. 
1965. 
1966. 
1967. 
1968. 
1969. 
1970. 
1971. 
1972. 
1973. 
1974. 
1975. 



180.4 


11.6 


191.2 


10.6 


202.8 


6.1 


209.7 


3.4 


224.5 


7.1 


243.7 


8.6 


258.2 


5.9 


268.4 


4.0 


277.8 


3.5 


296.2 


6.6 


312.8 


5.6 


322.0 


2.9 


321.2 


-0.25 


344.7 


7.3 


373.07 


8.2 


394.7 


5.8 


406.6 


3.0 


420. 15 


3.3 


441.8 


5.2 


444.1 


0.5 


429.9 


-2.0 



Note.— 21-year average, 5.12. 

Source: International Financial Statistics, vol. XXX, No. 5, May 1977, pp. 175-176. 



From 1971 to 1977, despite West Germany's sound balance of pay- 
ments position, economic growth was slow. Its annual growth rate for 
the 7 years averaged 2.7 percent. Thus the relatively modest German 
performance in 1977 has been consistent with its economic record 



throughout the decade. 



TABLE 1 1 i— 3. — INFLATION 





Consumer 

Price 

Index 

(1955 = 100) 


Percent 

changes in 

consumer 

prices 

(January to 

January) 


Year: 

1955 


100.0 
102.5 
104.7 
10S.9 
108.1 
109 5 
112.0 
115.4 
118.8 
121.5 
125.5 
130.0 
132.2 
134.2 
136.8 
141.4 
148. 9 
156.7 
167.5 
179.2 
190.0 


1.5 


1956 


2.5 


1957 


2.1 


1958 


2.1 


1959 


1.1 


1960 


1.3 


1961 


2.3 


1962 


3.0 


1963 


2.9 


1964 


2.3 


1965 


3.3 


1966 


3.6 


1967 


1.6 


1968 ... 


1.6 


1969 


1.9 


1970 


3.4 


1971 


5.3 


1972 


5.5 


1973 


6.9 


1974 


7.0 


1975 


6.0 






Source: International Financial Statistics, vol. XXX, No. 5, May 1977, pp. 176-177. 







21 

B. Inflation 

The Gorman Federal Republic; maintained the lowest inflation rate 
in Western Europe during the period under review. From 1955 to 1970 
its rate varied from 3.6 to 1.1 percent, while the average increase was 
3.3 percent. The Germans were able to keep the rate under 7 percent 
throughout the 1970's with the single exception of 1974 when the 
impact of the quadrupling of oil prices drove the rate up to 7 percent. 
By comparison the average rate of inflation for the 1970-75 period 
was 7.3 percent for France, 10.4 percent for Italy, and 12 percent for 
the United Kingdom. The strong fear of runaway inflation instilled 
by German experiences directly after World War I and the experience 
with worthless money after World War II helps explains the strict 
Government policy of keeping a firm grip on inflationary pressures, 
even at the cost of slowing down the recovery of the economy after the 
recession of 1974-75. 

C. Population and Employment 

In 1939 the population living in what became the three western 
zones of occupation after the war numbered 39.3 million. 2 Between 
1939 and 1975 the population of West Germany increased by more 
than half and totaled 61.8 million in 1975. The population figure 
dropped to 61.4 million in 1976. 3 The greatest growth occurred between 
1945 and 1961 when the largest migration in German history since the 
entrance of the Germanic tribes into Western Europe in the fourth 
century A.D. took place. Over 10 million East German refugees 
entered the Federal Republic before their escape routes were cut off by 
a closer surveillance of the intra-German border and the building of the 
Berlin Wall in 1961. West Germany benefited greatly from this steady 
influx of native Germans who were in general well equipped and highly 
motivated to rebuild the economy. After this source of supply was cut 
off German employers were forced to rely on workers from Southern 
Europe, especially Italy and Spain, and from Eastern Mediterranean 
and Middle Eastern countries, particularly Yugoslavia and Turkey. 
These sources supplied workers who were willing to take work which 
Germans refused to do and could be trained for industrial jobs as 
required. By 1973 the number of foreign workers peaked at approxi- 
mately 2.5 million. As German unemployment rose during the 1974-75 
recession many returned home. By 1978 it was estimated that about 
700,000 had left, 



- \Y allien, Henry C, Mainsprings of the German Revival, New Haven. Yale University Press, 1955, 
p. 263. 
3 International Financial Statistics, October 1978, p. 155. 



22 

TABLE 1 1 1—3. — POPULATION AND EMPLOYMENT 
[In millions] 



Year: 



Total 

population » 

(midyear 

estimate) 



1955. 52.4 

1956 53.0 

1957 53.7 

1958 54.3 

1959 54.9 

1960 55.4 

1961.. 56.2 

1962 56.8 

1963 57.4 

1964 58.0 

1965.... 58.6 

1966.... 59.2 

1967.... 59.3 

1968 59.5 

1969 60.0 

1970 60.7 

1971. 61.3 

1972 61.7 

1973 62.0 

1974 62.0 

1975 61.8 



Civilian 
labor Civilian 

force 2 employment 2 



Number 
unemployed - 



25.8 


25.4 


0.440 


26.0 


25.8 


.200 


26.2 


26.0 


.120 


26.3 


26.1 


.100 


26.4 


26.2 


.120 


26.3 


26.2 


.90 


26.4 


26.3 


.80 


26.4 


26.3 


.70 


25.8 


25.6 


.260 


25.7 


25.4 


.300 


26.0 


25.8 


.220 


26.2 


26.1 


.140 


26.3 


26.2 


.180 


26.1 


26.1 


.240 


26.4 


26.2 


.260 


26.3 


25.7 


.550 


26.0 


24.9 


1.020 



1 Source: International Financial Statistics, op. cit., pp. 176 177. 

2 These figures have been adjusted to U.S. concepts. They are based on tables prepared by the Bureau of Labor Sta- 
tistics and printed in hearings before the Committee on Finance, U.S. Senate, 94th Cong., 2d sess., Jan. 29, 30, and Feb. 4 
5, 1976, entitled "Oversight Hearings on U.S. Foreign Trade Policy," U.S. Government Printing Office, 1976, pp. 33-36. 

Since 1965 there has been a fall in the German birth rate. OECD 
analysts estimate that unless the rate is reversed "the German 
population of the Federal Republic will decline continuously between 
1976 and 1980 by an estimated annual average of 209,000 or 0.4 
percent." 4 

Between 1959 and 1974 the West German civilian employment 
remained quite stable in size, varying between 25.4 and 26.3 million. 
The recession of 1975 brought the figure to its lowest point of 24.9 
million. Thus the German civilian employment situation resembled 
the situations in Italy, France, and the United Kingdom by showing 
relatively little change, unlike the situation in the United States where 
civilian employment increased 38 percent during this period. The 
percentage of women in the German labor force was relatively con- 
stant, representing between 37.4 and 36.4 percent of the total labor 
force 5 during the 1959-75 period. 

The German Federal Labor Office's Research Institute estimates 
that the German labor force will grow continuously between 1976 
and 1989 despite the anticipated declining birth rate. The postwar 
baby boom should provide for an average annual rate of increase of 
6.3 percent during the period. The Institute analysts anticipate a 
slow increase in female participation. They also foresee a decrease of 
male participation in both the lower and upper age groups because of 
additional schooling and the introduction of a flexible retirement age. 6 



4 OECD Economic Surveys, Germany, 1976, i>. 22. 
« OECD Labor Force Statistics, 1969-1975. 
8 Economic Surveys, Germany, op. cit., p. 22. 



23 

Table III— 4. — West German labor force distribution by sector 

[In percent] 

1955: 

Agriculture 3. 6 

Industry 64. 2 

Other 32. 2 

1965: 

Agriculture 10. 7 

Industry 49. 3 

Other 39.8 

1975: 

Agriculture 7. 3 

Industry 46. 

Other 46. 7 

The post- World War II division of Germany altered the ratio of 
agricultural to industrial and other labor because Eastern Germany 
was the center of prewar German agricultural production, whereas 
prewar German heavy industry and mineral extraction were located 
predominantly in what is now West Germany. In 1955, only 3.6 
percent of the labor force worked in agriculture. By 1965, this figure 
rose to 10.7 percent. However, agricultural development in West 
Germany has only limited possibilities. Good arable land is in short 
supply, large areas being too sandy or covered by forest. Many farms 
are too small for economic cultivation. By 1975, the proportion of 
farmers to the total work force had dropped back to 7.3 percent. 
Thus, the Federal Republic resembles the United Kingdom rather 
than Italy or France in that no great internal migration occurred from 
farm to city to swell the industrial worker population. Between 1950 
and 1961, East German refugees provided the major source for the 
expansion of the worker population. As noted above, this source was 
unusually well qualified in terms of skills and motivation. 

D. Industrial Activity 

The data on employment in manufacturing compiled by the OECD 
should be considered only a general indicator of the manpower devoted 
to industrial production, since the OECD's definition of firms engaged 
in manufacturing as tabulated in the OECD Main Economic Indica- 
tors statistics had been changed over time. The index is constructed 
primarily on the basis of data on physical output in mining, manu- 
facturing, electricity, and gas. Each country supplying material may 
then exclude or include other categories, thus making direct compari- 
sons, with other OECD countries invalid. 

Figures in table III-5 show that employment in manufacturing in 
West Germany grew by almost 1.2 million between 1955 and 1975. 
Declines occurred in recession years 1963, 1966-67, and 1974-75. The 
last recession reduced the number of persons employed in manufactur- 
ing by about 94,000 from the high point of 8.293 million, registered in 
1970. While employment in manufacturing grew by 19 percent in the 
20-year period, industrial production increased by 175 percent, 
indicating greatly increased productivity. Employment in manufac- 
turing fell to 7.004 million in 1976. 

The figures on days lost through labor disputes are taken from the 
West German Statistisches Jahrbuch. A comparison of the figures on 
West German labor disputes with comparable figures for Italy, 
France, and the United Kingdom illustrates the moderateness of 
German industrial relations compared with other European countries. 



6,171 


10 


846 


6,599 


110 


263 


6,826 


114 


2,320 


7,013 


120 


779 


7,09 


129 


37 


7,46 


149 


61 


7,730 


161 


65 


7,790 


166 


450 


7,747 


169 


878 


7,805 


183 


16 


7,986 


195 


48 


7,949 


193 


27 


7,465 


180 


389 


7,562 


203 


225 


7,991 


242 


249 


8,293 


264 


92 


8,232 


262 


2,599 


8,058 


277 


60 


8, 107 


296 


563 


7,891 


293 


1,051 


7,362 


275 


68 



24 

Between 1960 and 1975, West German industry lost 6,841,000 days 
because of strikes as compared to 249,568,000 "for Italy, 63,062,000 
for France, and 155,147,000 for the United Kingdom. 7 

TABLE 111-5— INDUSTRIAL ACTIVITY 

Industrial Labor disputes 

Employed in production time lost 

manufacturing index (thousand 

(thousands) (1955=100) man-days) 

Year: 

1955 

1956 

1957 

1958 

1959 

1960 

1961 

1962 

1963 

1964 

1965 

1966 

1967 

1968 

1969 

1970 

1971 

1972 

1973 

1974 

1975. 

Source: OECD main economic indicators and Statistisches Jahrbuch fuer die Bundesrepublik Deutschiand, 1955-76. 

E. Balance of Payments 

As a guide to the use of the balance-of-payments table on the 
following page, the reader is referred to a list of definitions of the 
terms used in the first column of the table. These definitions are to 
be found on page 43 of the previously mentioned report on economic 
conditions in Italy, France, and the United Kingdom. (For a full 
citation, see p. vii above.) 

West Germany's rate of growth in dollar terms of exports was 
exceeded among the industrial nations only by Japan and Italy. 
Between 1955 and 1972, the dollar value of West German exports 
increased more than seven times, and between 1972 and 1975 almost 
doubled again. The depreciation of the dollar and the inflationary 
pressures of the 1970's contributed greatly to this rapid increase in 
value expressed in dollar terms. 

Since 1955, West Germany has never run an annual trade deficit — a 
record unmatched in Europe. In most years, however, the German 
invisible account has been in deficit. West Germany normally receives 
substantial amounts from transportation, investment income, and 
receipts from foreign troops stationed in Germany, but these were 
more than counterbalanced by travel of Germans abroad and other 
service expenditures. (In 1977, Germans spent roughly $8 billion on 
travel.) Since 1961, remittances of foreign workers have been the 
largest item of private transfer payments. In the early 1970's, they 
amounted to between $3 billion and $4 billion a year. 

7 Ibid. 



20 



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26 

During the 1955-75 period, there were only 4 years, 1961-62 and 
1964-65, when the West German current account was in deficit. The 
first period coincided with an upward revaluation of the German 
mark and the second with the slump of German exports which led 
to the recession of 1966-67. 

The West German annual capital account has ranged from a peak 
surplus of $4,973 million in 1973 to a record deficit of $9,590 million 
in 1974. The outflow of long-term German private capital did not 
begin to play a significant part in the West German capital account 
picture until 1968 when about $2.5 billion of private capital was 
invested abroad. The average outflow of private capital has recently 
been around $2 billion annually. (The total amount of German 
capital invested abroad is estimated at DM52.1 billion as compared 
to DM49.3 billion of foreign investment in West Germany.) 

Perhaps the most impressive feature in the balance-of-payments 
table is the steady growth of West German international reserves. 

Since 1955, these reserves have increased in value over 10 times. 



F. Exchange Rates 

During the 1955-71 period the mark was consistently undervalued. 
On several occasions the German Government revalued the mark to 
bring it more in line with its real value. It was revalued in 1961 by 
4.3 percent and again in 1969 by 9.3 percent. 8 It continued to fluctuate 
slightly until 1971 when the United States ended the Bretton Woods 
system of keeping currency changes within strict limits by allowing 
the dollar to float. The German Government then allowed the mark 
to float. Since then there has been a steady appreciation of the mark. 

A comparison of the dollar column on the table with the SDR 
column illustrates the dollar's present weakness. Particularly since 
1975, the West German Government has been disturbed by the 
constant appreciation of the mark and is discussing methods for the 
stabilization of the dollar with the United States and other OECD 
countries (see above, pp. 14-15). 

TABLE 111-7.— DOLLAR AND SDR EXCHANGE RATES FOR THE DEUTSCHEMARK 







Deutsche mark 


Deutsche mark 




Deutsche mark 


Deutsche mark 






per SDR 


per dollar 




per SDR 


per dollar 


1955 






4.215 


1966 




3.997 


1956 






4.199 


1967 




3.999 


1957 






4.202 


1968 




4.000 


1958.... 






4.178 


1969 




3.690 


1959.... 






4.170 


1970 


3.648 


3.648 


I960.... 






4.171 


1971 


3.548 


3.268 


1961.... 






3.996 


1972 


3.476 


3.202 


1962.... 






3.998 


1973 


3.260 


2.703 


1963.... 






3.975 


1974 


2.950 


2.409 


1964.... 






3.977 


1975 


3.069 


2.622 


1965.... 






4.006 








Source: 


Internationa 


1 Financial Statistics, 


May 1977, pp. 174-175. 






■ Ibid. 


, p. 175. 





27 

G. Import Dependence 

The four standard trade categories on the following table were 
chosen because they provide a fair presentation of those areas of 
import dependence which would most seriously constrain the activities 
of the importing country if they were interrupted. The figures reflect 
the great inflation of international commodity prices which occurred 
during the period. For this reason the ratios between various categories 
are more important than the raw figures themselves. 

During the period 1955-75, total West German imports increased 
from $5,793 million to $74,208 million. This represents an increase in 
value of over 15 times. In 1955, the four selected groups of imports 
represented 85.7 percent of total imports. At the end of the period 
this percentage decreased to 59 percent, reflecting the development 
of an increasingly affluent society importing larger amounts of con- 
sumer goods. 

The reduction in the percentage of total imports devoted to food 
and live animal imports is of interest. In 1955, this category accounted 
for 24 percent of total imports. By 1975, this figure was reduced to 
12 percent of the total, only slightly higher than the 10-percent figure 
for France in the same year. 

Mineral fuels accounted for 9 percent of total imports in 1955. The 
increase of the mineral fuels percentage from 11.4 percent in 1973 
to 19 percent in 1974 and 1975 reflects the impact of the fourfold 
rise in the price of OPEC petroleum. 



28 



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29 

Throughout the entire period, the percentage of total imports 
accounted for by semiprocessed manufactures — iron bars, aluminum 
shapes, copper wire — remained almost constant. In 1955, it was 20.5 
percent; in 1975, it was 19 percent. 



IV. INSTITUTIONAL FACTORS 

A. The Managerial Class 

The defeat in World War IT profoundly changed the social structure 
of West Germany. Some of the aristocrats, soldiers, public official-, 
and civil servants, who were at the top of the hierarchy, lost their 
standing. Crushing defeat stripped the military of its luster; the aris- 
tocrats were divided and often impoverished (those in East Germany 
were expropriated); in the mood of postwar cynicism politics had little 
appeal. In short, the industrialists, the bankers, and the merchants 
had become the most prestigious persons in the country, giving Ger- 
man management a hitherto unknown sense of assurance and power. 
This new self-confidence is reflected by the way businessmen think of 
themselves. One student of German management * has noted that they 
speak of their work as a "calling" and themselves as members of a 
special elite. 

German top executives shared the German characteristics of energy, 
dedication to their jobs, and hard work. The engineering talent at 
their disposal was of high quality. The training German engineers 
receive from the German Technische Hochschulen (technical univer- 
sities) is among the best available in Europe. 

The style German managers set was an autocratic one, particularly 
in family businesses. A firm's top executive was likely to keep the 
decisionmaking power firmly in his own hands. The administrative 
structure was highly centralized. The function of initiating changes, 
in particular, was closely guarded. The German traditions of discipline, 
paternalism, and obedience which characterize other aspects of Ger- 
man life, such as family relations, also operated strongly in industrial 
relations. One American observed in the late 1950's that he found the 
German top executive "dominates with the omnipresence of an 
18th century Hohenzollern." 2 

As German firms became bigger and older there was a tendency for 
them to become set in their ways. A failure to delegate prevented the 
adoption of modern methods of business management. In recent years 
Frank Vogl has reported there have been changes taking place in Ger- 
man companies. The recessions of 1967 and of the early 1970's have 
shaken many companies severely and forced them to modernize their 
business methods. 3 

The usual organizational structure of a corporate German firm 
provides for two directing bodies: The executive committee (Vorstand), 
and the supervisory board (Aufsichtsrat). The Vorstand runs the 
company and takes all the business decisions. Its chairman is the top 
executive officer. The other members are heads of the key departments 

' Hartmann, Heinz. Authority and Organization in German Management. Westport, Conn., Greenwood 
Press, 1970. pp. 25-32 (first ed. 1959). 

2 Ibid., 60. 

3 Vogl, Frank. German Business After the Economic Miracle. New York, John Wiley & Sons, 1973, pp. 
96-97. 

(31) 



32 

of the firm. In many cases the chairman is the effective head of the 
company although in some companies the Vorstand acts in a collegial 
fashion and reaches decisions jointly. A Vorstand is small, generally 
numbering five or six. 

The Aufsichtsrat represents the stockholders. It has no executive 
power and meets only two or three times a year. But its powers are 
significant because it can dismiss the chairman of the Vorstand, or the 
entire Vorstand, if it objects to the way the affairs of the company 
have been handled. In the case of the Krupp firm two Vorstand chair- 
men were forced to resign in a year. 4 

The unique feature of the German Aufsichtsrat is the participation 
of labor representatives on the board. Under the terms of the co- 
determination legislation of 1976 all firms employing more than 2,000 
workers must provide for the election of labor representatives to one- 
half of the places on their Aufsichtsrat. Smaller firms must reserve 
one-third of the places for labor representatives. 

A principal feature of the West German managerial s} r stem is the 
role played by banks. The three largest banks, the Deutsche Bank, the 
Dresdner Bank and the Commerzbank own more than 25 percent of 
a wide range of large German companies. For example, the Deutsche 
Bank has more than a 25-percent holding in Daimler-Benz, four 
machinery manufacturers, four textile companies, and diverse other 
industries. The other two banks operate on the same scale, as do 
smaller banks on a smaller scale. These holdings enable the banks to 
name directors on the supervisory boards of the companies concerned. 
With holdings of more than 25 percent a bank's representative is in a 
position to block any company decisions of which the bank dis- 
approves. In some cases the banks are able to vote the stock of their 
customers by proxy. Thus through a series of interlocking relation- 
ships the banks can exercise a strong influence upon the German 
economy. In general they have encouraged mergers. Moreover, 
although the German economy has no planning machinery similar to 
the French national planning office, the close connections between top 
bankers and the Ministries of Finance and Economics tend to develop 
a coordinated view of how German economic policy should develop. 5 

The establishment of holding companies and mergers, in which 
German banks have been important participants, illustrates another 
characteristic of German businessmen — a preference for a managed 
home market rather than for aggressive competition. Writing in 
1955, Henry Wallich commented on this trait as follows: 

The disinclination of German businessmen to compete aggressively in the home 
market is interesting in several respects. It is of course perfectly natural for busi- 
nessmen to combine in restraint of trade where the law does not interfere, since it 
means higher profits. The German penchant for order and organization also works 
in favor of cartelized markets. But the tencU ncy toward cartels and similar protec- 
tive arrangements may have deeper roots. In general these devices imply a 
sin render of opportunity in return for security. The possibility of conquering a 
bigger market is given up, or at least reduced. 6 

In conclusion, the effective way in which German managers operate 
in export markets deserves a special note. Firms like Volkswagen have 
won such a large part of many foreign markets by the most careful 



■ ; 1 1 .id., p. 37. 

■< 6chnitzler, Martin. East and West Germany: A Comparative Economic Analysis. New York, Praeger, 
1972. pp. L56 L57. 
' Wallich, op. tit ., p. 336. 



33 

advance planning. They study every conceivable angle of the market 
and tailor their products and their sales pitches to the particular 
characteristics of each market. When their trade falls off they have 
been willing to absorb losses rather than risk losing connections which 
they have so laboriously developed. 7 

B. The Trade Unions 

The Allied Occupation Authorities in West Germany early gave their 
approval to the rebuilding of the German trade union movement 
which had been suppressed by Hitler. By 1949, a single central organi- 
zation for all German labor, comprising L6 nationwide industrial 
unions, came into being. 8 This clearcut and orderly organization had 
great advantages. It avoided the confusion created by competing 
unions divided along religious or ideological lines, as was the case in 
France and Italy, or the innumerable disputes likely to occur among 
unions with overlapping jurisdictions, as was the case in the United 
Kingdom. 

The major responsibility of the union is the negotiation of wage 
contracts since many other matters affecting labor are regulated by 
legislation — such as job security, vacations, and maternity benefits. 
Wages are generally negotiated between the organization on the state 
level of a union and an emplo3 r er association. Prosperous firms, how- 
ever, often pay wages far above the union scale. 

Particularly in the 1950's, unions were moderate in their wage 
demands. The first generation of postwar labor leaders took account 
of the broad national interest in their dealings with management. 
Professor Wallich wrote in 1955 as follows: 

The labor leadership, it is fair to say, has demonstrated remarkable statesman- 
ship and breadth of vision. It has never lost sight of the interests of the economy 
as a whole, with its need for large-scale investment and financial stability, and 
has been mindful also of the repercussions of labor successes upon the weaker 
groups — pensioners and refugees. 9 

Some reasons for the moderate increases in German pay until the 
end of the 1980's have been suggested. In the 1950's and early 1960's 
German trade unions were relatively weak. Only about one-third of 
German workers joined a union. Older workers' memories of the failure 
of prewar union leaders to protect their interests dampened their 
enthusiasm for the labor movement. This lack of interest was strength- 
ened by the long period of continuing economic expansion. 

Furthermore, the German workman — particularly alter the experi- 
ences of the early postwar period — put as high a value on job security 
as on w^ages. German workers were unlikely to go on strike unless 
they got generous strike pay and unions disliked using up their strike 
funds. The relations resulting from codetermination between top union 
officials and top management may have made it easier to make union 
leaders understand the problems of business management. Last the 
highly professional training which German union leaders receive 
facilitated the negotiating process. 

7 Yogi, op. feit., pp. 1UB-132. 

*■ Wallich, op. cit., p. 305. 
6 Ibid., p. 310. 



34 

Aggressive action for higher wages was unusual until the latter part 
of the 1960's. 10 One British observer, however, believes that an aggres- 
sive approach to labor relations on the part of West German unions is 
likely to continue because of the characteristics of the new generation 
of union leaders, whom he describes in the following terms: 

The unions are being led in large measure now by a younger generation of well- 
educated men, who have travelled widely and learned a great deal about industrial 
relations, negotiating tactics and strikes from the militant union leaders in other 
countries. The men who rebuilt the unions after the war and who saw their jobs in 
close relation to the national interests of rebuilding a powerful industrial country, 
have been largely replaced by men who pay scant regard to the national interest, 
but whose sole interests concern increasing the power, influence and well-being of 
German workers. 11 

An important feature of German labor organization is the works, 
council. These councils are generally credited with having made an 
important contribution to the good labor-management relations that 
prevail in Germany. 12 The works council is altogether divorced from 
the union. Its members are chosen by the employees in a firm to repre- 
sent them before management. The council handles grievances and 
deals with the improvement of unsatisfactory working conditions. But 
it weakens the unions because it prevents them from developing the 
close ties which exist between union officials and workers in the United 
States. 

C. CODETERMINATIOX 

The German codetermination law (Mitbestimmungsrecht) of 1951 
and workshop constitution law of 1952 provide the basis for the 
representation of employees in the management of the firm in which 
they work. The notion of workmen's participation in management 
had been developed by leftwing thinkers in the 19th century. The 
concept was revived after the war and was incorporated into the 
social program of the Christian Democratic Party. It was strongly 
supported by the British occupation authorities. The Adenauer 
government introduced legislation establishing codetermination which 
was approved by the tripartite occupation authorities in 1951 and 
1952. 

In the case of coal and steel firms the codetermination law of 1951 
provided that the employees of a firm should elect one-fourth of the 
members of the firm's supervisory board (Auf sichtsrat) . One-fourth of 
the members were to be selected by the appropriate union and the 
remaining half by the stockholders and the management of the firm. 
A tiebreaking additional member was to be chosen by the labor and 
management-stockholder members. The law also provides that labor 
shall have a member on the executive committee (Vorstand) which is 
the center of executive control over the firm and takes all the business 
decisions (subject to review by the supervisory board). The labor 
member of the Vorstand is in charge of personnel matters and is 
considered a full equal of the other members. 

Under the terms of the 1952 workshop constitution law, which 
applied to companies other than coal and steel companies, the Labor 
role was considerably reduced. The labor representation was set at one- 
third of the supervisory board and no labor representative sat on the 
executive committee. 



10 Borne strikes did occur dining the 1950'sand early 1960's. For example, there were sizable strikes in 1951 
1953, 1954, 1957, and 1964. Schnitzler, op. cit., p. 182. 

11 Vogl, op. cit., p. 75. 

'2 Wallich, op. Cit., p. 307. 



35 

The co determination law of 1970 applies to all firms employing 
more than 2,000. ll covers about 600 companies, including approxi- 
mately 50 subsidiaries of U.S. firms. Under the new law one-hall of I lie 
members of the supervisory board must be labor representatives who 
are elected under complicated provisions. A director of labor is to be 
included in the executive committee but the law docs not give the 
employees a veto over his appointment. 18 

Companies had until .June 30, 1978, to comply with its provisions. 
Corporations employing between 500 and 2,000 workers will continue 
to be governed by the workshop constitution law of 1952. 

D. The West German Civil Service 11 

Following World War II and the complete dismantling of the Ger- 
man Government under Allied occupation, a new administrative 
system had to be established. After considerable debate over alter- 
native systems, the civil service was restored basically in its prewar 
form. 

The new service retained much of the power and job benefits of 
its predecessor but the social standing of the civil servant declined 
significantly. This loss of prestige has been traced to the collapse 
of the Third Keich, which left the civil service demoralized and 
discredited. Another factor affecting the image and position of the 
civil service has been the change of its class composition. The bureauc- 
racy has become increasingly middle class under German democ- 
racy. Furthermore, recruits no longer necessarily represent the 
brightest among university graduates, as they once did. Private 
industry, with its higher salaries, is attracting more top graduates. 

The Federal Republic employed as of 1970 over 2.1 million people 
in the civil service. Under the Federal system, the administration of 
the Government is carried out at the Federal, State, and local levels. 
Officials at all three levels have civil service status. 

Administration at the Federal level is carried out by the ministries. 
Each ministry is divided into sections headed by a ministerial director, 
who is the immediate subordinate of the minister and serves at the 
minister's pleasure. Technical!}', the position of ministerial director 
is the only political appointment below the minister. The next rank 
of ministerial manager (Ministerialdirigent) is a civil service appoint- 
ment with security and protection, although the position is not 
immune to political influence. Owing to the small number of non- 
civil-service positions within the ministries, the bureaucracy has a 
greater role in top-level decisionmaking than civil servants in most 
countries. Since much of the minister's time is occupied by party 
duties, civil servants are left in charge of a large share of the ad- 
ministrative functions. 

German Government personnel are divided into three categories: 
Officials (Beamte), employees (Angestellte), and workers (Arbeiter). 

13 The constitutionality of a section of the 1976 law hns been challenged by the German Federation of 
Industry and is now under review by the Federal Constitutional Court. 

n This section is based on a report on the West German civil service contained in "History of Civil Service 
Merit Systems of the United States and Selected Foreign Countries together with Executive Reorganiza- 
tion Studies and Personnel Studies" compiled by the Library of Congress, Congressional Research Service 
for the Subcommittee on Manpower and Civil Service of the Committee on Post Office and Civil Service, 
House of Representatives, 95th Cong., 2d sess., Dec. 31, 1976, p. 391-410. 



36 

All three categories are to be found at the Federal, State, and local 
government levels. The Beamte category is subdivided into basic 
service, middle service, executive service, and higher service. 

The German civil service elite is the higher service of the Beamte. 
A university degree not in a specific field and an extended proba- 
tionary period are required for admission. Acceptance in the higher 
service opens the door to the highest echelons of government. The 
higher service includes approximately 10 percent of officials. 

In practice entrants into the higher service have law degrees, with 
specialization in administrative law. Indeed the German law faculties 
are said to perform the role of the British public schools and the 
French Grandes Ecoles in preparing students for public service. 
(Public administration was introduced only recently as a field of study 
in German universities.) The heavy representation of lawyers in the 
civil service may account for the German tradition of legal conscious- 
ness and legalism among bureaucrats. 

Since university enrollment continues to consist largely of students 
from upper- and middle-class families, the charge is frequently made 
that the Government is not doing enough to open up the civil service 
recruitment process. 

Today, as before, mobility between the different categories of the 
civil service is virtually nonexistent. There are some opportunities to 
advance from the basic to the middle service, as a result of similar 
educational requirements. However, promotion from the middle to the 
executive service or from the executive to the higher service occurs 
only in the most exceptional cases. The opportunity for advancement 
is greatest within the higher service. The German civil service has 
traditionally been depicted as one in which length of tenure is the 
sole determinant of rank. 

In practice, the German civil service has become highly politicized. 
The loose relationship between ministers and parliament is credited 
with having brought about a tight bond between the political executive 
and the civil service, resulting in what critics have called a politicized 
bureaucracy and a bureaucratized policy. There is considerable 
movement between the career civil service and elective office. Many 
leading postwar politicians have civil service backgrounds at the 
local, State, and Federal level. 

During a span of two decades the degree of politicization in the 
bureaucracy was not apparent because one party, the Christian 
Democrats, governed continuously. However, with the transfer of 
government to the SPD in 1969, there was a change of approximately 
20 percent of division head positions. Although the changes were not 
necessarily based on party affiliations, political motivations appeared 
to be a major factor. 

In conclusion, the German civil service has undergone considerable 
expansion and adaptation in the postwar period, without formal 
change in the structure of the service or the laws governing it. In 
general, the service is viewed as responding adequatelv to the changing 
needs of modern West Germany and performing efficiently. At the 
same time, there is a growing body of opinion that changes are needed 
in the organization, training, career development, and standardization 
of job benefits. 



37 

E. Governmental Stability 

The drafters of the German basic law took particular pains to 
guard the new republic from the destabilizing effects of frequent 

changes in government. They hoped to avoid a repetition 01 the 
series of weak and shifting governments of the Weimar Republic 
and the French Third Republic by making it more difficult to bring 
down a government by a vote of no confidence. 

The method by which they proposed to do so was introduced by 
article 67 of the basic law, which reads as follows: 

The Bundestag can express its lack of confidence in the Federal Chancellor 
only by electing a successor with a majority of its members and requesting the 
Federal President to dismiss the Federal Chancellor. The Federal President musl 
comply with the request and appoint the person elected. 15 

This provision ruled out the long interregnums which occurred 
in both Italy and France. It also made it possible for Chancellor 
Adenauer to govern the Federal Republic with an iron hand lor his 
first term in office (1949-53) by a majority of one because there was no 
other party leader who could command a majority. 

Despite the ingenuity of the drafters of the basic law, the evolution 
of the German party system has made it easier to change governments 
than in the early days. The tendency of the smaller parties in West 
Germany to dwindle has left only three parties qualified to sit in the 
Bundestag by obtaining the obligatory 5 percent of the total vote. 
Since the two major parties — the CDU/CSU and the SPD — are very 
close to one another in size, the third party, the Free Democratic 
Party (FDP), is in a position to decide who shall be Chancellor. (Only 
on one occasion did a German party have a majority. In 1957 the 
CDU won 50.2 percent of the vote or 277 seats out of a total of 519 16 
of which 12 were nonvoting Berlin seats.) 

It was the FDP which forced Chancellor Erhard to step down in 
1966 bv withdrawing from the FDP-CDU coalition. This prepared 
the way for the CDU-SPD coalition of 1966-69 in which Willy 
Brandt served as Foreign Minister. In the election of 1969 the FDP 
agreed to join the SPD, thus making Will}' Brandt the first postwar 
SPD Chancellor and placing the CDU Party in the opposition for the 
first time. The key importance of the FDP has been shown by the fact 
that the Ministry of Foreign Affairs has been given to an FDP member 
regularly since 1969, despite the small size of the parliamentary party 
(40 seats). 

The FDP-SPD coalition has continued from 1969 up to the present 
although since 1976 it rests on a majority of only 10 seats. It should 
be able to continue up to the next Federal election, scheduled for 1980, 
provided the SPD takes account of the limits of FDP support of the 
alliance. If that point is passed, the FDP might decide to switch again 
and support the CDU. Under present circumstances, however, it 
would be difficult for the FDP to change sides before the 1980 election 
without weakening its own electoral chances by antagonizing members 
of the party who favor a SPD-FDP coalition. 



' 5 Peaslee, Amos J., Constitutions of Nations, Second edition, La Hague, Netherlands, Martinus Nrjhoff, 
1956. p. 41. 

6 In 1969 the SPD came within 3 percent of the CDU/CSU. Sontheimer, Kurt, The Government and 
Politics of West Germany, New York, Praeger Publishers, 1973, p. 87. 



38 

In local elections on June 6, 1978, the FDP received less than 5 
percent in Hamburg and Lower Saxony. 17 After the 1980 election, the 
FDP party leaders, if they surmount the 5-percent barrier, should be 
in a stronger position to change the party's alignment. A postelection 
FDP-CDU coalition should not be ruled out. 

There are changes occurring in the SPD, which, if they come to 
dominate party policy, might lead to the breakdown of the present 
coalition. It seems unlikely, however, that such changes would take 
place before 1980. Among younger SPD members there is a growing 
movement in the direction of the traditional Socialist policies which 
were abandoned in 1959. The party leadership has long had difficulty 
in keeping the young Socialists and the left wing of the party in line. 
If the economic situation in the Federal Republic worsens and orthodox 
remedies fail to reduce unemployment, radical socialists are likely to 
call lor increased public spending, the application of controls suitable 
for a siege econonry, and the large-scale nationalization of industry. 
Up to the present the SPD left has had little influence on party 
policy. 

Under the pressure of the recession of 1974-75 and its aftermath — 
particularly the high level of unemployment — the SPD has lost in 
popular support. SPD seats in the Bundestag dropped from 230 in 
1972 to 214 in 1976. (The earlier figures reflect Brandt's popularity.) 
The pressure of the upcoming 1980 Federal parliamentary election 
will also come to bear on the FDP, Avhich faces the possibility of falling 
below the 5-percent limit. These pressures may work against the intro- 
duction of new programs, particularly in view of the smallness of the 
Government's majority. 

If the CDU/CSU returns to power, no profound changes in economic 
policy are likely to occur because the differences between the present 
( Chancellor and the CDU/CSU are not great. The most likely changes 
would be a curtailment of the growth of social benefits and further 
reductions in personal and corporate taxes to stimulate business. 

The Federal Republic has experienced none of the large-scale demon- 
si rat ions that have shaken France, and no radical political develop- 
ments have occurred like the near victory of the French left in March 
1978 or the increasing political power of the Communists in Italy. 

But the existence of the Red Army faction in the Federal Republic, 
supported by a small number of students and young intellectuals and 
admired by a larger number of young people who are not active par- 
ticipants, raises questions both within West Germany and without. 
As in the case of other countries where powerful terrorist organiza- 
tions are in operation, the chilling efficiency of the terrorists cannot 
fail to make people wonder to what extent the terrorists may be able 
to disrupt civilian life and destabilize the government. 

The German phenomenon is disturbing because it is hard to tell 
how far and how deep it extends. The influence of Marxist, Maoist, 
and nihilist professors in German universities is strong. To some, the 
vision of destroying soeiety so that Utopia can rise from the ashes is 
compelling. In seeking to explain these attitudes, German writers 
have pointed to the rejection of the values of the older generation in 
Germany by their children. It has been suggested that the immediate 
postwar generation's obsession with money and material things may 
have repelled children who had never known the deprivations of the 

>< New York Times, June 6, 1078, p. 4. 



39 

1940's. Some have asked whether the present generation lias not be m 

the victim of German history because a late unification, two defeal 3, 
and Nazism have left a disturbed and confusing legacy devoid of the 
stabilizing influences of deeply rooted traditions. 

Such ruminations cannot fail to arouse questions about the stability 
of the German political system. But it must also be borne in mind that 
the German postwar performance has been remarkable in many way-. 
Germans have been exemplary in carrying out their responsibilities. 
The quality of their top officials has been generally h'mii. Popular sup- 
port for democratic institutions has been consistently strong. 

F. The Economic Philosophies of West German Political 

Parties 

(1) the christian democratic uniox/christiax socialist union 

As the largest closely linked political party grouping in the Federal 
Republic, the Christian Democratic Union/Christian Socialist Union 
(CDU/CSU) represents a wide range of interests. 18 Founded directly 
after the war as a union of Catholics and Protestants without prece- 
dent in German history, its philosophy contains views from Christian 
leaders espousing social justice, the improvement of living and work- 
ing conditions for workers, and the strengthening of Christian educa- 
tion. Through their influence, plans were developed for redetermina- 
tion in industry which gave the German labor movement the greatest 
voice in the management of industry in the European Community. 

The party also reflected the views of industrialists, bankers, lawyers, 
and other members of the managerial and professional classes. In 
accordance with these members' interests, the party has advocated 
the policies of free enterprise and free trade developed by Ludwig 
Erhard as Economics Minister. In general terms, the party stands for 
a minimum of Government interference in the operation of the eco- 
nomic system, though CDU governments have not made major 
attempts to return to private hands those parts of the German indus- 
trial structure which have been under Government control. An 
exception is the case of the Volkswagen firm, which had been estab- 
lished as a state-owned company by Hitler. Its stock was sold in small 
denominations to private investors. The party accepts the need for 
Government operation in some sectors of the economy, such as the 
railroads, and for state ownership of large blocks of stock in other 
cases, such as the big hydroelectric complex VEBA. 

In the 1960's, CDU economic policy changed significantly. The 
continuous boom of the Adenauer period called for little Government 
direction. But in the post-Adenauer period a series of business cvcles 
with troughs in 196:], 1966-67, 1971, and 1974-75 required more 
governmental action to keep market forces in balance. The CDU, in 
coalition with the SPD, agreed on the necessity of economic manage- 
ment along Keynesian lines and sponsored new legislation in 1965-67 
to enlarge the Government's power to deal with economic crisis. 

Since the retirement of Adenauer, the CDU Party has lost much 
of its creative force. Kurt Sontheimer has described this situation in 
the following terms: 



i* The Christian Democratic Union and the Christian Socialist Union, which is the religiously oriented 
party in Bavaria, are organized as separate parties along geographic lines, but they function as a single 
entity on the national level. 



40 

The vigor of the beginning period, which with all its economic growth had 
encouraged many to vote for the CDU, began to slacken off. The CDU which 
had started off as an at least partly progressive force in German politics became 
more and more a defender of what had been without developing any new ideas 
for the future of Germany. This explains why from 1966 onward under Kiesinger's 
government the CDU's image was that of a weak party governed by too many 
divergent interests, a party which had drawn to it too many opportunists and 
which had become prey to an immobility which it tried pathetically to cover up 
with rhetoric, not always without nationalist undertones. 19 

(2) THE SOCIAL DEMOCRATIC PARTY 

As noted above, the Social Democratic Party changed its orienta- 
tion in the late 1950's under the direction of Herbert Wehner. The 
party leadership dropped the traditional prewar platform of a Socialist 
party with its emphasis in the transformation of the economic system 
through large-scale nationalization. In its place in 1959 it adopted the 
Godesberg p /ogTam which accepted the general outlines of a free 
entepHse system but called for constant imp:ove:ne its in social 
programs and the status of the working class within the fra r n3\vork 
of a market economy. 

When the party entered the Government as a partner with the 
CDU in 1966, it gave support to a program calling for stronger Gov- 
ernment direction of economic affairs than had baeu the case in the 
Adenauer period. SPD economist Prof. Karl Schiller became the 
Minister of Economics in 1966 and continued in this position in the 
coalition formed between the SPD and FDP in 1969. During the 6 
years wdien he was in charge of economic policy, Schiller conducted 
it along Keynesian lines. He used the Government's ability to regulate 
such key economic factors as the money supply, the discount rate, the 
level of taxation, and the size of governmental expenditures to dampen 
down inflation and protect the soundness of the German mark. 

Schiller resigned in 1972 over policy differences within the party. 
His decision to limit Government expenditures and constrict the 
economy to avoid inflation was overruled in the Cabinet in favor of a 
more expansionist policy to combat imemployment. 

The leading figure in the determination of economic policy after 
Schiller's resignation has bee i Hslrnut Schmidt, first as Economics 
Minister and since 1974 as Chancellor. Schmidt has not been as 
dedicated to the prevention of inflation at all costs as his predecessor 
and has permitted some reflation of the economy. But he continues 
to place great importance on antiinflationary measures. He has kept 
inflation in the last 2 years at rate of 4.5 percent or less, at the cost of 
high unemployment and an economw which grew in 1977 at a rate of 
only 2.75 percent. 

Willy Brandt, who resigned as Chancellor in 1974 as the result of a 
spy scandal in his private office in which he was in no way implicated, 
is now secretary general of the party. Although sometimes critical of 
foreign policy actions of FDP Foreign Secretary Genscher, there are 
no signs that Brandt has ambitions to regain the chancellorship. 
Nor is it likely that Brandt, who comes from the right wing of the 
party, would become a leader of the party's left wing. He has supported 
Schmidt's policies throughout and, although temperamentally different 
from him, apparently has great respect for his abilities. 



'' Sonthoimor, op. cit., p. 88. 



41 

There are indications thai younger Social Democrats are becoming 
increasingly dissatisfied with the present Leadership. Professor Halleu 
lias described the change which is taking place as follows: 

During the period of the SPD-FDP coalition, the SPI) moved markedly to 
the left. The Young Socialists, in effect, rejected the Godesberg program and 
returned to the policy of complete state ownership of the means of production, 

distribution and exchange which had been the party's policy in the immediate 
postwar years. Without going so far, many leading members of the party became 
skeptical of "social market economy" and "global guidance" ; they began to favor 
a more dirigiste economic policy. The view gained wide acceptance that, so long 
as its victims were compensated (for example through "dynamic pensions") an 
annual inflation of 4, 5, percent was nothing to worry about, and certainly unim- 
portant compared with other objectives, such as the fullest possible level of 
employment. 20 

(3) THE FREE DEMOCRATIC PARTY 

The members of the Free Democratic Party who backed the SPD 
coalition in 1969 are economic liberals. They believe in free trade and 
private enterprise. But they are ready to support Keynesian measures 
in times of economic recession and are generally pragmatic in their 
approach to economic problems. They have little difficulty in support- 
ing the programs of Chancellor Schmidt. However, if the left wing of 
the SPD were able to move into a position in which they could deter- 
mine party policy along protectionist and nationalization lines, it 
seems likely the FDP members would be forced to leave the coalition 
because of their own economic philosophy and the attitudes of their 
electorate. 



20 Hallett, op. cit., pp. 80-81. 



V. CONCLUDING COMMENT 

The previous paper on Italy, France, and the United Kingdom 
ended with a set of hypothetical scenarios outlining various possible 
future developments in each of the three count lies. That this does 
not seem to be a useful approach in the case of West Germany indicates 
the degree of stability and continuity of policy which that country 
has achieved. 

Of course the Federal Republic is subject to numerous stresses 
and strains. The interrelationship of East and West Germany and the 
unsolved problem of German reunification remain as sources of 
insecurity. But the decision initiated by the Brandt Government to 
accept a long-term modus vivendi with East Germany suggests that 
East-West German relations can continue indefinitely as they are. 
As we have seen, the German economy faces structural problems. 
Continued unemployment, if linked with inflation and the radicalism 
of the extreme left, might bring about political difficulties. But 
the prospects of this happening in the near future appear small. 

A. Short-Term Political Possibilities 

In the short run, however, there are various possible courses which 
West German developments might take. Given the narrowness of the 
SPD-FDP coalition majority of 10, elections held before the termina- 
tion of the present Bundestag's term of office in 1980 cannot be ruled 
out. If the Government is unable to enact an important part of its 
legislative program because of defections among its supporters or 
deaths or the loss of a two-thirds majority in the Upper House of the 
German Parliament (as a result of a CDU victory in a state election) 
a new national election might take place before 1980. 

In the case of a general election in 1980 or before, the FDP may fail 
to win the necessary 5 percent to enter the Bundestag, as the party did 
in recent state elections in Hamburg and Lower Saxony. If this should 
happen the membership of the Bundestag might be reduced to the 
two major parties. Up to the present the SPD has never succeeded 
in winning a larger percentage of the national vote than the CDU. 
If the FDP does enter the new parliament it is not certain that the 
party will choose to continue its coalition alliance with the SPD. 
In short, although Helmut Schmidt's chances of continuing as Chan- 
cellor now appear good, they cannot be taken for granted. 

The names most frequently named as candidates for the chancellor- 
ship in the event the CDU can command a parliamentary majority 
are Helmut Kohl, longtime leader of the CDU Party, Ernst Albrecht, 
Premier of Lower Saxony, Alfred Dregger, leader of the CDU Party 
in the pivotal state of Hesse, and Franz Josef Strauss, leader of the 
Bavarian CDU. Strauss is an independent-minded maverick who 

(43) 



44 

occasionally is at odds with CDU Party leaders. He is thought to be 
considering running a slate of candidates for a yet to be formed 
National Party in the upcoming election to the European Parlia- 
ment as a trial balloon. 

As noted above (see p. 38), under any CDU/CSU leader there 
would probably not be major changes in German economic policy. 
There is little likelihood that any moderate German Government 
would draw the country away from its close identification with 
basic U.S. military, political, and economic policies. The entry of a 
conservative government, however, might strengthen the left wing 
of the SPD Party, thus increasing left wing influence in the trade 
unions, making industrial relations more contentious, and lessening 
the degree of popular consensus on policy which had been one of 
West Germany's major strengths. 

B. U.S. Policy Objectives and the Federal Republic 
of Germany 

The State Department has summarized U.S. polic} r aims in respect 
to the Federal Republic of Germany (FRG) in the following term-: 

(1) To maintain confidence in the U.S. commitment to the security 
of Europe and the FRG; 

(2) To encourage a major FRG contribution to NATO; 

(3) To consult closely with the FRG on matters affecting its vital 
interest ; 

(4) To cooperate closely with the FRG in efforts to minimize 
nuclear proliferation; 

(5) To coordinate U.S. and FRG economic policy both bilaterally 
and in international forums such as the OECD; 

(6) To maintain U.S. rights and responsibilities in Berlin and 
provide for the viability of the city. 

The main lines of United States- West German cooperation seem 
well established. West Germany refused to weaken this association 
despite the efforts of President de Gaulle in the midsixties to create a 
strong Franco-German entente at the expense of the United States. 
This demonstrated how dee]) was the German conviction that the 
Federal Republic's exposed military position required a close partner- 
ship with the United States within the North Atlantic Alliance. An 
example is the enthusiastic German support for the continued strength- 
ening of the Alliance under the 5-year program of increasing the 
NATO annual budget by 3 percent over and above inflation. Another 
example was the United States-German agreement to increase the 
standardization of NATO weapons by equipping the new U.S. XM-1 
tank with a German gun. However, future competition for contract 
for standardized equipment will undoubtedly arise and may be more 
difficult to settle. 

The sensitivity of West Germany to United States-Soviet bilateral 
negotiations will doubtless remain acute so that careful and thorough 
briefings during any such negotiations affecting German interests will 
continue to be in order. Multilateral negotiations with the Soviet 
Union in which the Federal Republic participates (such as the MB1< R 
uegotiations or the continuation of post-Helsinki discussions) should 
not be compromised by a change of Government in West Germany. 
On security and disarmament issues the CDU/CSU has consistently 
taken a harder line than the present Government. Thus no matter 



45 

which party is m power the Germans should continue to be firm in 
ruling out any proposals thai they consider would weaken the German 
position in Central Europe. 

The German urgent interest in developing advanced technologies 
which will enable them better to survive in future international com- 
petition and to meet their energy requirements may lead to future 
differences regarding the proper safeguards on the development and 
export of nuclear technologies. A portent of future controversies was 
given by the questions raised by the German contract to sell a uuclear 
reprocessing plant to Brazil. 

As described above, German interests in the economic field generally 
reinforce those of the United States when major issues are involved. 
There will, of course, be clashes of interest involving special groups. 
German farmers support French and other EC farmers in insisting on 
the protective features of the common agricultural policy (CAP) to 
which U.S. agricultural exporters strongly object. 

As members of the European Community, hard-pressed German 
industries, such as steel, may benefit from nontariff trade barriers 
erected by the European Community. 

The West Germans are likely to resent too strong attempts to dictate 
German domestic economic policy as was the ca.se in the U.S. FRG 
argument about reflation versus inflation. The Germans will probably 
continue to criticize U.S. inability to control the size cf its balance of 
payment deficits. But in the major issues of economic policy it seems 
likely that the United States and West German positions will tend to 
reinforce one another. 

No matter what the coloration of any moderate government, there 
will be a common United States-West German interest in making the 
international economic system work. Thus it seems likely that this 
mutual interest will continue to produce in the end such agreements 
as the understandings between the U.S. Treasury and the German 
Ministry of Finance to work together to bolster the dollar. By the same 
token it is in the interest of any moderate German Government to 
work together with the United States in the OECD, the IMF, and 
other international organizations to improve relations with less devel- 
oped countries which will become increasingly important in the future 
as sources of raw materials and markets for the advanced products of 
the older industrial countries. 

C. A Final Comment 

Finally, the elementary fact that politically and economically the 
Federal Republic is the strongest country in Europe should be re- 
emphasized. It is the only European country with liquid assets (in the 
form of over $43 billion dollars in reserves) sufficiently large to be used 
constructively on a large scale for international purposes. Some Ger- 
mans themselves have suggested using these reserves for a German 
version of the Marshall plan to strengthen the economies of candidates 
for membership in the European Community or for backing the devel- 
opment of a European currency. If the German Government decides 
to take concrete steps to carry out such plans, the European Com- 
munity would receive a new impetus and West Germany would assume 
a leadership role which up to the present it has been careful to avoid. 

o 



UNIVERSITY OF FLORIDA 



3 1262 09119 3143